BUY KAR MOBILES LTD. CMP (Rs) Target Price (Rs) MAY 27 th, 2013 SYNOPSIS. Result Update: Q4 FY13

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1 BUY CMP (Rs) Target Price (Rs) KAR MOBILES LIMITED Result Update: Q4 FY13 MAY 27 th, 2013 ISIN: INE916E01011 Stock Data Sector Auto Components BSE Code Face Value wk. High / Low (Rs.) / Volume (2wk. Avg ) 140 Market Cap ( Rs in mn ) Annual Estimated Results (A*: Actual / E*: Estimated) Years FY13A FY14E FY15E Net Sales EBITDA Net Profit EPS P/E Shareholding Pattern (%) SYNOPSIS Kar Mobiles Ltd is engaged in the manufacture and marketing of engine valves, collets and guides for applications in internal combustion engines. The company s net profit registered a 5.51% increase & stood at a record Rs million from Rs million over the corresponding quarter last year. The company has reported an EPS of Rs for the 4 th quarter as against an EPS of Rs in the corresponding quarter of the previous year. During the year under review, sales of KML in the domestic After-market grew by 4% and Export market grew by 12%. 1 Year Comparative Graph Kar Mobiles Ltd has recommended to the shareholders a final dividend of Rs per equity share on the paid up equity capital of Rs. 2,24,00,000 comprising of 22,40,000 equity shares of Rs.10/- each fully paid-up. BSE SENSEX KAR MOBILES LTD KML is the first Indian company to become the vendor partner to General Motors. Kar Mobiles Ltd is an ISO certificated for the environment Management practices. Peer Groups CMP Market Cap EPS P/E (x) P/BV(x) Dividend Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%) Kar Mobiles Ltd Exide Industries Ltd Motherson Sumi Ltd Amtek India Ltd

2 Investment Highlights STANDALONE Results updates- Q4 FY13 Kar Mobiles Ltd is engaged in the manufacture and marketing of engine valves, collets and guides for applications in internal combustion engines, reported its financial results for the quarter ended 31 st MARCH, Automobile and Tractor markets continued to remain weak this quarter with major segments like Farm Tractors and Medium & Heavy Commercials registering negative growth. Months MARCH-13 MARCH-12 % Change Net Sales % PAT % EPS % EBITDA % The company s net profit increased to Rs.9.76 million against Rs.9.25 million in the corresponding quarter ending of previous year, a rise of 5.51%. Revenue for the quarter fell 8.93% to Rs million from Rs million, when compared with the prior year period. Reported earnings per share of the company stood at Rs.4.36 a share during the quarter, registering 5.51% increase over previous year period. Profit before interest, depreciation and tax is Rs millions as against Rs millions in the corresponding period of the previous year. Expenditure: Break up of Expenditure Rs. Million Q4 FY13 Q4 FY12 Cost of Material Consumed Employee Benefit Expenses Depreciation & Amortization Expense Other Expenses

3 Latest Updates Financial Year During the year under review, sales of KML in the domestic After-market grew by 4% and Export market grew by 12%. Dividend Declared Kar Mobiles Ltd has recommended to the shareholders a final dividend of Rs per equity share on the paid up equity capital of Rs. 2,24,00,000 comprising of 22,40,000 equity shares of Rs.10/- each fully paid-up. Company Profile Kar Mobiles Ltd established in the year 1974 for the production of the quality values for the internal combustion of the engines values. The company obtained Industrial license for specialized values unit for catering to export demand. This export-oriented unit at Tumkur in Karnataka has commenced production from August Kar Mobiles Ltd is engaged in the manufacture and marketing of engine valves, collets and guides for applications in internal combustion engines. The company having the technical collaboration with TRW Inc, USA and having the global excellence in the product and also in the process technologies the company caters the wide variety of the industries which specializes in the supply of the values to the manufacturer s large engines. Kar Mobiles Ltd is the first company becomes a vendor partner to the general motors. Kar Mobiles Ltd ISO certification for environment management practices. Rane Group of companies Rane group started manufacturing in the year 1959 with the Strategic Technical Alliance and to access the best technology and supplied to the major OEM in India and also abroad to serves a large variety of the segments related to the industry. Passengers cars Multi Utility Vehicles Light Commercial Vehicles Medium & Heavy commercial Vehicles Farm tractors Three Wheelers Two Wheelers Stationary Engines

4 Products Engine Values: The following are the applications ranging the engines in the segments such as: Agricultural/Industrial/Stationary Marine Locomotives Battle tanks Farm Tractors Automotive High Performance cars Manufacturing Units Bangalore Tumkur Structure of Rane Groups

5 Indian customers Ashok Leyland Cummins Eicher Escorts Force FIAT Ford Major Overseas Customers Hero Honda Hindustan Motors Honda Hyundai General Motors Mahindra Maruti Suzuki Renault Swaraj Mazda TAFE Tata Toyota TVS Audi(Hungary) Deutz( Germany) Electro Motive (USA) John Deere (USA) Kubota (Japan) Yamaha(Asia) Lister Petter (UK) Renault Dacia (Romania) Siam Kubota (Thailand) Skoda Auto (Czech Republic)

6 Financial Highlights STANDALONE Balance sheet as at March31st, 2012 EQUITY AND LIABILITIES: Shareholders Funds: (A*- Actual, E* -Estimations & Rs. In Millions) FY12 FY13 FY14E FY15E Share Capital Reserves and Surplus Net worth (a) Non-Current Liabilities: Long-term borrowings Deferred Tax Liabilities [Net] Long Term Provisions Long term liabilities (b) Current Liabilities: Short-term borrowings Trade Payables Other Current Liabilities Short Term Provisions Current Liabilities Total (a+b+c) ASSETS: Non-Current Assets: Tangible Assets Long Term Loans and Advances (d) Current Assets: Inventories Trade Receivables Cash and Bank Balances Short Term Loans and Advances Other Current Assets (e) Total (d+e)

7 Annual Profit & Loss Statement for the period of 2012 to 2015E Value(Rs.in.mn) FY12 FY13 FY14E FY15E Description 12m 12m 12m 12m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross profit Depreciation Profit Before Tax Tax Net Profit Equity capital Reserves Face value EPS Quarterly Profit & Loss Statement for the period of 30 th SEP, 2012 to 30 th JUNE, 2013E Value(Rs.in.mn) 30-Sep Dec Mar June-13E Description 3m 3m 3m 3m Net sales Other income Total Income Expenditure Operating profit Interest Gross profit Depreciation Profit Before Tax Tax Net Profit Equity capital Face value EPS

8 Ratio Analysis Particulars FY12 FY13 FY14E FY15E EPS (Rs.) EBITDA Margin (%) 10.35% 8.29% 8.53% 8.83% PBT Margin (%) 6.46% 2.54% 2.60% 2.62% PAT Margin (%) 4.40% 2.26% 1.76% 1.77% P/E Ratio (x) ROE (%) 18.15% 9.18% 7.09% 7.04% ROCE (%) 25.72% 27.15% 27.95% 28.97% Debt Equity Ratio EV/EBITDA (x) Book Value (Rs.) P/BV Charts

9 Outlook and Conclusion At the current market price of Rs , the stock P/E ratio is at x FY14E and x FY15E respectively. Earning per share (EPS) of the company for the earnings for FY14E and FY15E is seen at Rs and Rs respectively. On the basis of EV/EBITDA, the stock trades at 4.20 x for FY14E and 3.89 x for FY15E. Price to Book Value of the stock is expected to be at 0.80 x and 0.74 x respectively for FY4E and FY15E. We recommend BUY in this particular scrip with a target price of Rs for Medium to Long term investment. Industry Overview The Indian auto component industry is expected to reach a turnover worth US$ 113 billion by from US$ 43.4 billion in , according to a Automotive Component Manufactures Association (ACMA) report titled, 'Auto Component Industry in India: Growing Capabilities & Strengths'. The exports from the industry are expected to grow at a compound annual growth rate of 17 per cent during , the ACMA report highlighted. India has emerged as one of the world's most competitive tyre markets due to vast availability of raw material (natural rubber) and ultramodern production facilities. The radial tyre market is expected to reach Rs 393 billion (US$ 7.33 billion) by FY 2015 growing at a CAGR of more than 21 per cent during FY 2011-FY The automotive plants of global automakers in India rank among the top across the world in terms of their productivity and quality. Top auto multinational companies (MNCs) like Hyundai, Toyota and Suzuki rank their Indian production facilities right on top of their global pecking order. The Indian automobile and auto components industry can be expected to surpass China's growth path by 2021, according to a research report by Espirito Santo Securities. Market Structure The tyre production in India is anticipated to reach 191 million units by the end of FY 2016, according to a RNCOS research report titled, 'Indian Tyre Industry Forecast to 2015'. The manufacturers are expected to invest huge amount into the industry over the next few years, with a major proportion of this investment directed towards the radial tyre capacity expansion.

10 In addition, with a significant increase in the number of CNG vehicles, the CNG vehicle market is witnessing a strong growth pattern. According to a RNCOS report titled, "India CNG Vehicle Market Analysis", the CNG kit market is expected to reach around INR 30 Billion in FY 2014, growing at a CAGR of around 22 per cent during FY India: The Global Auto Hub The amount of cumulative foreign direct investment (FDI) inflow into the automobile industry during April 2000 to January 2013 was worth US$ 8,061 million, accounting to 4 per cent of the total FDI inflows (in terms of US$), as per data published by Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce. A delegation of Japanese auto component companies visited Tamil Nadu (TN) to explore investment opportunities and scout for partnerships with Indian auto component makers. The State houses over 300 Japanese companies and these tier 1 companies would need support from tier 2 component makers and other micro, small and medium enterprise (MSME) suppliers. Apollo Tyres plans to expand its reach in Association for South East Asian Nations (ASEAN). The company will set up a subsidiary to explore market opportunities in the region. Honda Cars India Ltd (HCIL) plans to export diesel engine components to Asian and European markets from India. Key Developments and Investments Supportive government policies, positive business environment, availability of reasonably priced talented workforce and stable outlook for the industry has made India a global hub for the international manufacturers to set up their facilities in the country. The auto components manufacturers are also reaping the benefits. Federal-Mogul has announced the launch of Ferodo commercial-vehicle (CV) brake lining in the Indian market. The product is being manufactured at the company's spanking new plant in Chennai Alten will set up an automotive testing facility at its labs in Chennai, Tamil Nadu. The facility will help automobile manufacturers in and around Chennai to outsource testing of components such as diesel engines and suspension system Toyota Kirloskar Auto Parts has commenced production at a new engine and transmission plant for the Etios range of sedans and hatchback cars in India. Production at the new plant involves an investment of about Rs 500 crore (US$ million)

11 Five auto component companies in Chennai-Rane Group, MM Forgings, Super Auto Forge, Natesan Industries and Auto Parts-are setting up a solar power plant in Tamil Nadu. The solar farm, with an installed capacity of seven megawatt (MW), could entail a total investment of Rs 70 crore (US$ million) Volkswagen (VW) India Pvt Ltd has set up a unit to manufacture and package parts of the Vento and Polo for export at its Pune plant. Announcing the inauguration of the parts and components Business Unit, the company said it has invested around Rs 56 crore (US$ million) to develop it Government Initiatives The Government of India plans to introduce fuel-efficiency ratings for automobiles to encourage sale of cars that consume less petrol or diesel, as per Mr Veerappa Moily, Union Minister for Petroleum and Natural Gas. The Government's electric vehicle (EV) policy calls for a plan worth Rs 23,000 crore (US$ 4.26 billion), to promote the production of electric and hybrid vehicles over the next eight years, and set a sales target of 6 million units by In a bid to improve safety features of vehicles, the Government has asked automobile manufacturers to develop a gadget which would be similar to the 'black box' installed in planes. The owner would not be able to turn the instrument off or on and the snapshot could be viewed by legal bodies, insurance companies and automakers. Moreover, Mr C P Joshi, Minister of Road Transport and Highways, Government of India, has also asked manufacturers to contemplate on the option of fixing such IT-enabled instrument to improve safety and security of the vehicles. Some of the highlights of the Union Budget : The auto industry is encouraged by 5 years extension of 200 per cent weighted deduction of research and development (R&D) expenditure under Income Tax Act and also introduced the weighted deduction of 150 per cent for expenditure on skills development. These measures will help the industry improve its products and performance The increase in customs duty on cars and multi-utility vehicles (MUVs) valued above US$ 40,000 from 60 per cent to 75 per cent seems to be a step to encourage local manufacturing, value addition and employment Also, the concessional import duty on specified parts of hybrid vehicles has been extended to lithium ion batteries and other parts of the hybrid vehicles. This will help the industry to achieve better cost efficiency Road Ahead The vision of Automotive Mission Plan (AMP ) aims India to emerge as the destination of choice in the world for design and manufacture of automobiles and auto components with output reaching a level of US$ 145

12 billion accounting for more than 10 per cent of the gross domestic product (GDP) and to provide additional employment to 25 million people by The rapid improvement in infrastructure, huge domestic market, increasing purchasing power, established financial market and stable corporate governance framework have made the country a favorable destination for investment by global majors in the auto industry, as per AMP The Plan aims at doubling the contribution of automotive sector to the GDP with special emphasis on export of small cars, MUVs, two & three wheelers and auto components. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.

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