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1 Feb 5, 2015 Sundram Fasteners Ltd (SFL) No. of shares (crore) 21.0 Mkt cap (Rs crs) 4120 Current price (04/02/15) Price target (Rs) week H/L (Rs.) 218/43 Book Value (Rs.) 43 P/BV (FY15e/16e) 4.5/3.9 P/E (FY15e/16e) 25.8/20.9 BSE Code NSE Code SUNDRMFAST Bloomberg SF IN Reuters SNFS.BO Daily volume (avg. weekly) Shareholding pattern % Promoters 49.5 MFs / Banks / FIs 18.8 Foreign 2.8 Govt. Holding 0.0 Non-Promoter Corp. 2.2 Total Public 26.7 Total As on Dec 31, 2014 Recommendation REDUCE Analyst KISHAN GUPTA, CFA, FRM Phone: + 91 (33) E- mail: kishan.gupta@cdequi.com Company Brief Sundram Fasteners (SFL), a leading auto - component manufacturer, produces high-tensile fasteners, powder metal components, cold extruded parts, hot forged components, radiator caps, automotive pumps, gear shifters, gears and couplings, hubs and shafts, tappets and iron powder for global players from its businesses in India, China, UK, Germany and Malaysia. Quarterly Highlights SFL's third quarter net profit rose by 5.2%, the weakest recording in six quarters, due to decline in operating margins and sharp jump in finance costs. Operating margins came off over 400 bps from the previous quarter thanks to massive jump in 'other expenses' (up 42.7%). Finance costs more than doubled to Rs crs last quarter not least due to surge in exchange loss on foreign currency loans. Sales though rose at the fastest pace in five quarters helped by rapid growth in domestic sales. Exports has also held firm for most of this year thanks to buoyant US auto market. As a result, share of exports to total turnover jumped 150 bps to 38.3% in first nine months of current fiscal. After having grown at breakneck speed in the first half of current fiscal, earnings have lost momentum largely due to lower operating margins (12.4% in Q3FY15 compared to 16.2% in H1FY15). Other income slid to Rs 9.39 crs in 9MFY15 from Rs crs as foreign exchange gains nosedived to Rs 4.66 crs from Rs crs in the same period a year ago. Yet mild recovery in domestic commercial vehicle market and sustained growth in overseas shipments (up 23.5%) has helped post 260 bps expansion in operating margins to 14.9% in first nine months, a breathtaking departure from average margins of 12.7% in the last five years ending fiscal The stock currently trades at 25.8x FY15e EPS of Rs 7.61 and 20.9xFY16e EPS of Rs We assign a reduce rating on the stock with price target of Rs 160 based on 17x FY16e earnings (on valuation grounds, please refer to page 3 and 4), over a period of 6-9 months. Figures in Rs crs FY12 FY13 FY14 FY15e FY16e Income from operations* Other income EBITDA (other income included) Adjusted net profit after MI EPS EPS growth (%)

2 Outlook & Recommendation Indian auto industry yet to fully recover India's passenger vehicle segment continues to drag its feet for its domestic sales has grown by just 3.7% in the Apr-Dec period. With the Union government rolling back excise concessions in Dec last year, The Society of Indian Automobile Manufacturers (SIAM) scaled back its full year target by three percentage points to 1%. Still SFL has shown smart recovery in its domestic sales so far this fiscal largely helped by modest rebound in sales of M&HCVs (up 10.33%) while the LCV sales declined 12.8%. SFL s domestic sale is therefore expected to kowtow the trend in domestic industrial activity and post growth in mid teens next fiscal. Exports on the boil SFL's exports climbed 23.5% in the first six months of current fiscal buoyed by strong recovery in US auto market where sales hit an eight year high last year. Fall in gasoline prices, which declined 34% to less than $2 last year, explains much of the 5.8% increase in sales. According to Kelley Blue Book, a vehicle valuing source, average transaction price for a new vehicle sold in the U.S. market in December was a record $34,367, up 2.5 percent from a year ago. Record sales prompted LMC Automotive to forecast sale of 17m units in 2015 (16.4m in 2014). Yet analysts and some industry executives reckon that the industry would slowdown this year after gut-wrenching expansion from the depth of the financial crisis. Morgan Stanley reckons ongoing capacity expansion of American carmakers would significantly outpace demand by Further it notes that 10m cars are sold in oil - exporting countries - whose sales would decline as their economies suffer. Ford has been hit hard in Russia by west imposed sanctions while Fiat Chrysler could be pushed back by recession in Brazil compounded by global slump in commodity prices. 2 2

3 [ [ German operations still battling SFL's German operations is yet to see the light of the day as it reported yet another year of loss (~ 2.1 m euros)last fiscal. After showing resilience in the first half of current fiscal, the German operations plunged again thanks to collapse in demand; we estimate it to show deficit of 2.3 m euros this year. Yet the EU passenger car registrations expanded for the sixteenth consecutive month in December, thus taking the year end growth to 5.7%, first annual increase in six years (see chart). Spain recorded the highest annual increase (18.1%) followed by UK (9.3%), Italy (4.2%) and Germany (2.9%). Even the new commercial vehicles registrations rose 7.6% in 2014 helped by Germany (4.8%), UK (10.8%), Italy (13.9%) and Spain (31.6%). The growth was led by robust dispatches of light commercial vehicles, while the demand for heavy trucks shrank by 6.1% (German and Spanish markets expanded by 6.1% and 25.6% respectively last year (see chart). Capex With exports growing at full throttle, SFL has lined up robust expansion plans to support its exports. It commenced a new factory (SEZ 2) at Mahindra World City for manufacture of new variants of shafts in last financial year. Plans are afoot to invest Rs 150 crs in expanding capacities of existing products - engine components, metal powder products etc, besides adding capacities of new products in current fiscal. Yet capacity utilization may get impacted due to prejudice to maintain 'bad sizes' of few products like radiators and gear shifters to push margins higher. Valuation Though SFL would report awe-inspiring earnings growth of 27.8% in two years ending fiscal 2016, its earning is prone vulnerability for two chief reasons. First, the growth in domestic automobile market is still fragile to say the least: trends in passenger vehicle segment are still wobbly with extreme fluctuations in growth of monthly sales. Though M&HCV sales have displayed sturdy growth in last few months but it has come on a small base. Second, export growth would moderate next fiscal not least because of peaking US automobile market, which accounts for nearly 85% of its total exports. 3 3

4 The stock currently trades at 25.8x FY15 e EPS of Rs 7.61 and 20.9x FY16e EPS of Rs The stock has been rerated in last few months thanks to buoyant exports and mild domestic recovery. Operating margins swelled too: up 260 bps in 9MFY15. But emerging deflationary trends in Europe could stymie sales of overseas subsidiaries in Germany and UK; a weaker euro would also prompt translation losses. Factoring all odds, we have revised next fiscal earning estimate by nearly 10%, but advice caution. Therefore, the stock merits a reduce recommendation with revised target of Rs 160 (previous target: Rs 137) based on 17x FY16e EPS of Rs 9.37 (ten year average P/E: 15); for more info, refer to our report dated July 17, 2014 Risks & Concerns Forex volatility SFL is heavily exposed to high volatility in forex volatility not least because of its foreign currency debt and exports. Though it does hedge all short foreign currency debt obligations, the long term obligations are left unhedged, exposing the financials to forex fluctuations. Slowdown in auto sector SFL's sales have taken a hit for couple of years ending fiscal 2014 due to slowdown in Indian and American auto sectors. It has not only impacted its exports but also the performance of its European subsidiaries - Cramlington Precision Forge and Peiner Umformtechnik; its European subsidiaries have reported sharp dip in profitability last fiscal year with the German operations posted a loss of 2.1m euros. Cross Sectional Analysis Company Equity* CMP Market Interest cap* Sales* PAT* OPM a NPM a Cov. ROE a P/BV P/E EV/EBITDA Amtek Ind L.G.Bala Subros Sundram WABCO * Figures in Rs crs; a: in % 4 4

5 Financials Standalone Quarterly Results Figures in Rs crs Q3FY15 Q3FY14 % chg. 9MFY15 9MFY14 % chg. Revenue from Operations Other Income Total Income Total Expenditure PBIDT Interest Depreciation PBT Tax Reported PAT Extraordinary Item Adjusted Net Profit EPS (F.V. 1) Consolidated Income Statement Figures in Rs crs FY12 FY13 FY14 FY15e FY16e Revenue from Operations Growth (%) Other Income Total Income Total Expenditure EBITDA Interest PBDT Depreciation Tax Reported PAT Minority interest PAT after MI Extraordinary Item Adjusted Net Profit EPS (Rs.)

6 Consolidated Balance Sheet SOURCES OF FUNDS Figures in Rs crs FY12 FY13 FY14e FY15e FY16e Share Capital Reserves Total Shareholders Funds Minority interest Total Debt Total Liabilities APPLICATION OF FUNDS Gross Block Less: Accumulated Depreciation Net Block Capital Work in Progress Investments Current Assets, Loans & Advances Inventory Sundry Debtors Cash and Bank Loans and Advances Total CA & LA Current liabilities Provisions Total Current Liabilities Net Current Assets Net Deferred Tax Other Assets (Net Of Liabilities) Total Assets

7 Key Financial Ratios FY12 FY13 FY14 FY15e FY16e Growth Ratios Revenue (%) PBIDT (%) Net Profit (%) EPS (%) Margins Operating Profit Margin (%) Gross Profit Margin (%) Net Profit Margin (%) Return ROCE (%) RONW (%) Valuations Market Cap / Sales EV/EBIDTA P/E P / BV Other Ratios Debt-Equity Current Ratio Interest Coverage Turnover Ratios Fixed Asset Total Asset Debtors Inventory Creditors Working Capital WC Ratios Debtor Days Inventory Days Creditor Days Cash Conversion Cycle

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