Clutch Auto Ltd SYNOPSIS. Target Price: Rs Date: January 18, 2010

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Marilynn Simmons
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1 Clutch Auto Ltd BUY CMP: Rs Date: January 18, 2010 Key Ratios: Particulars FY09A FY10E FY11E OPM (%) NPM (%) ROE (%) ROCE (%) P/BV(x) P/E(x) EV/EBDITA(x) Debt-Equity(x) Key Data: Sector Auto Ancillaries Face Value Rs wk. High/Low 90.20/14.95 Volume (2 wk. Avg.) BSE Code V.S.R. Sastry Vice President Equity Research Desk Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer Target Price: Rs Market Cap.:Rs mn. SYNOPSIS We initiated the coverage of Clutch Auto Ltd and set a target price of Rs Clutch Auto Ltd (CAL) is the largest supplier of clutches to the commercial vehicle and tractor segment in India. It is also India s largest exporter of clutches and exports to 40 countries, 85% to Americas. Increase in market share of the leading Truck manufacturer in USA, with whom the Company has made long term supply contracts will enhance Company's business opportunity. A number of global automotive players are setting production capacities in India, which can benefit component makers. The Company, by launch of identifiable genuine products across full range, was able to weed out spurious products which led to sharp rise in sales in replacement market from current year, leading to further rise in replacement market sales to over 55% soon. The top line and bottom line of the company are expected to growth a CAGR of 17.47% and 47.12% over FY09 to FY11E. Share Holding Pattern: 1

2 Table of Content Content Page No. 1. Investment Highlights Company Profile Peer Group Comparison Key Concerns Financials Charts & Graph Outlook and Conclusion Industry Overview 17 2

3 Investment Highlights Results Update (Q3 FY10) For the quarter ended on December 31, 2009 (Standalone) the company has registered a % (YOY) growth in the net sales and stood at Rs mn from Rs mn of the corresponding period of the previous year.the operating profit for the quarter stood at Rs mn from Rs mn, for the same quarter of last year. Operating profit margin surged to 16.56% from the corresponding previous quarter of 12.37%. PAT for the quarter ended December 2009 increased significantly by 52.26% to Rs millions from Rs millions. EPS for the quarter stood at Rs.1.42 per equity share of Rs Quarterly Results Standalone (Rs in mn) As at Q3FY09 Q3FY10 %Change Net Sales % PAT % Basic EPS(Rs) % 3

4 Margins (%): Operating Profit Margins (OPM %) Net Profit Margins (NPM %) 4

5 Clutch Auto to acquire land in Rajasthan for Rs 150 mn The company board has approved the proposal to acquiring 50,000 sq mtrs land (industrial plot at Kahrani (Bhiwadi extn.) district Alwar, Rajasthan at a to cost of Rs 150 million.the management has taken this decision with a broader objective to shift the factory from its present site at Faridabad to Kahrani (Bhiwandi Extn.), Rajasthan at a much bigger space (almost double size) at low cost for its expansion. The site at Kahrani is close to the industrial corridor - Manesar industrial area, which has easy proximity and locational advantages. Ventured into the US truck market The company has ventured into the US truck market through the aftermarket route making it the only offshore company to be able to do so. It plans to be a niche player in the low volume, high value added heavy-duty clutch segment for class 7 and 8 trucks. This is because, the replacement demand for trucks in US, with a population of nearly 4.5-5mn units, is nearly as high (250,000 units pa) asthe demand for new trucks. CAL invested in technology& research CAL invested in technology, research and filed for patents and trademarks for a number of products that it developed. Today, the company is the only independent component company from India with an independent patents and trademarks portfolio. It has built many innovative products like the Cool Clutch, Whisper and EZ N Lite offering interchangeability unit-to-unit, component-to component with the same serviceability norms and tools. 5

6 Company Profile Clutch Auto was founded way back in 1971 and now it is India s largest clutch manufacturer & exporter. Clutch Auto Ltd (CAL) is the largest supplier of clutches to the commercial vehicle and tractor segment in India. It also caters to the passenger vehicle and replacement demand.the company is India s largest clutch manufacturer & exporter has held 3 Decades of undisputed Leadership.The company is also India s largest exporter of clutches and exports to 40 countries, 85% to Americas.The company is having largest aftermarket distribution network in India and has state-of-the-art testing facility for Clutches. The company is having Govt. of India recognized Research &development facility. It also caters to the passenger vehicle and replacement demand and its clientele includes Tata Motors, Ashok Leyland, Maruti Udyog, TAFE, Toyota, BEML, Escort Tractors and State Transport Undertakings, among others. Clutch is a technology intensive business dominated by 6 players in the world, all operating either as joint ventures or as technology partners or license arrangements. CAL is the only standalone clutch company in the world, which is testimony to its technology capability. The company has developed, upgraded and upsized Ceramic and Cushioned Organic Clutches with Retrofittability on old models of the popular trucks and buses, carving a new market segment with a long term aftermarket potential besides fitment on current ongoing production. Peculiarities of Indian operating conditions both in case of passenger carriers and commercial vehicles and driving habits have been taken into consideration and performance demonstrated after simulation and evaluation of modified Designs based on the valuable field data. The Cool Clutch developed for the US market along with Wear Indication capability the Whisper series and Ez N Lite Twin Ceramic Self-Aligning clutch for heavy applications have been offered to the Indian customers. 6

7 Business Areas: Clutch Auto is catering to three sectors viz. OEM, Replacement Market and Exports. Even under depressed business environment, the Company was able to optimally use its product mix. The Company was able to make good the shortfall in OEM sales by introducing 77 new products by fiscal year end in the Aftermarket and Exports segment. Clutch Auto has made long term commitments to OEMs' in Commercial Vehicle & Tractor segments including a Co-Manufacturing Agreement with a MNC Clutch Manufacturer. 7

8 Products: Clutch Cover Assemblies Clutch Plates/Discs Others 8

9 Major customers: 1. Bajaj Auto 2. Mahindra Group 3. Maruti, 4. Tata Motors 5. BEML 6. Eicher 7. Indian Army etc. Besides, commanding dominant position in domestic market, CAL supplies to 40 countries across the globe. Latin America and North America forms the major (about 80%) overseas market for Clutch Auto. 9

10 Peer Group Comparison Name of the company CMP(R.s) (As on Jan ) Market Cap. (Rs. Mn.) EPS (Rs.) P/E (x) P/BV (x) Dividend (%) Clutch Auto Motherson Sumi Sys Amtek Auto Bosch Key Concerns Infringements by local players in unorganized sector. General market environment. Penetration of Spurious products in Aftermarket segment. New Technologies. Consolidation by the Competitors in domestic arena. OEM's target to have total control on the Aftermarket can significantly impact company's Replacement Market operations. Competition from Chinese low cost manufacturers can be a threat to Company's business in some segments 10

11 Financials Results updates 12 months ended Profit&loss Account (Standalone) Value(Rs. in million) FY08A FY09A FY10E FY11E Description 12m 12m 12m 12m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Net Profit Equity Capital Reserves Face Value Total No. of Shares EPS(Rs)

12 Quarterly Ended Profit & Loss Account (Standalone) Value(Rs. in million) 30-Jun Sep Dec Mar-10E Description 3m 3m 3m 3 m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Net Profit Equity Capital Face Value Total No. of Shares EPS(Rs)

13 Charts A) Net sales & PAT Chart B) EV/EBITDA(x) chart 13

14 C) P/E(X) Chart D) P/BV(X) chart 14

1 Year Comparative Graph Outlook and Conclusion At the current market price of the stock Rs81.70.00, the stock trades at a P/E of 14.67 x and 12.42 x for FY10E and FY11E respectively.

15 1 Year Comparative Graph Outlook and Conclusion At the current market price of the stock Rs , the stock trades at a P/E of x and x for FY10E and FY11E respectively. The EPS of the stock is expected to be at Rs.5.57 and Rs.6.68 for the earnings of FY10E and FY11E respectively. The top line and bottom line of the company are expected to growth a CAGR of 17.47% and 47.12% over FY09 to FY11E. On the basis of EV/EBDITA, the stock trades at 4.20 x and 4.33 x for FY10E and FY11E respectively. Price to Book Value of the stock is expected to be at 1.03 x for FY10E and 0.95 for FY11E. 15

16 The Indian automobile industry is on fast revival after tough period in later half of FY09. With confidence returning in economy, CV and Capital goods sales are witnessing upward trend after almost 2 years of slow down. Indian ancillary industry itself has emerged as hub for global markets. There is fast expansion in Service network by all auto makers and vehicle owners are becoming more sensitive to quality of service, which can benefit branded components makers like CAL. Company, by launch of identifiable genuine products across full range, was able to weed out spurious products which led to sharp rise in sales in replacement market from current year, leading to further rise in replacement market sales to over 50% soon. A number of global automotive players are setting production capacities in India, which can benefit component makers. The replacement market is the most important segment, accounting for 47% of the sales. CAL has vast marketing pan India network of 37 marketing offices in 20 major cities. Latest trend indicates that in second half, the sales to OEMs as well as to replacement market is growing at a very fast pace. This will result in to much higher capacity utilizations and with faster growth in replacement market, plus margins will grow still better. Growth in Auto Industry directly benefits the Ancillary industry. We recommend BUY in this particular scrip with a target price of Rs for Medium to Long term investment. 16

17 Industry Overview Automotive Industry, a prominent segment of the national economy was adversely affected due to Global slowdown, however, continued to survive due to Govt, of India's committed expenditure on the infrastructure sector of the economy. This is the first year of set back ever since the Automotive Mission Plan 2016 was announced by the Government of India with growth rate estimated at 6%, after achieving double digit growth in recent years. The year witnessed steady falling demand for medium and heavy commercial vehicles (MHCV), which was primarily due to overall slowdown in industrial production. The severe demand shortage since October, 2008 led the leading commercial vehicle manufacturers to cut down schedules drastically, followed by repeated lay-offs, resorting to repeated book closures, job-cuts etc. This was coupled with huge credit crunch and the working capital of large OEMs virtually exhausted, impacting on liquidity of the Tier I suppliers. Hardening of interest rates coupled with higher inflationary pressures and industrial slowdown affected the input costs and availability of essential raw materials very adversely resulting in both bottom and top lines in the Automotive Industry. In-spite of RBI and other Financial Institution's continued initiatives to enhance liquidity in the system, Bankers were shy to increase their exposure in the Automotive Sector, and as such could not virtually make any impact on the liquidity. The situation was further fuelled by the Transporters strike in early January, 2009 for a shorter haul. Transporters have deferred purchases despite stable freight rates with rising cost of ownership impacting their profitability amidst concerns over freight demand sustainability. In International arena, US Heavy-Duty truck sales hit their lowest level in 16 years during 2008, falling for the second straight year, even though they made a modest recovery after hitting bottom in May, Further, several North American truck and engine makers underwent significant change during 2008 as they prepare for the next round of federal emission regulations slated for The fall out of the US Big Three viz. GM, Ford & Chrysler made significant impact on the component manufacturers in India. 17

18 As per SIAM Report, overall Industry performance in was as under In domestic market, Passenger vehicle segment registered growth of 0.13% during , the sale of overall commercial vehicles declined by (-) 21.69%. Medium and Heavy Commercial vehicles declined by (-) 33.16% and Light Commercial vehicles recorded de-growth at (-) 7.10%. In Exports market, saw automobile exports growth of 23.61% with all segments except Commercial vehicles, which was declined at (-) 27.67% during the year. The Indian auto ancillary industry has come a long way since it had its small beginnings in the 1940s. If the evolution of the industry is traced in India, it can be classified into three distinct phases namely: Period prior to the entry of Maruti Udhyog Ltd, Period after the entry of Maruti Udhyog Ltd and Period post Liberalization. The period prior to the entry of Maruti Udhyog Ltd was characterized by small number of auto majors like Hindustan Motors, Premier Automobiles, Telco, Bajaj, Mahindra and Mahindra, low technology and assured business for most of the autocomponent manufacturers. The entry of Maruti in the 1980s marked the beginning of the second phase of the industry. The auto ancillary industry in the country really showed a spurt in growth during this period. This period witnessed the emergence of a new generation of auto ancillary manufacturers who were required to meet the stringent quality standards of Maruti s Korean collaborator Suzuki of Japan. The good performance of Maruti resulted in an upswing for the domestic auto ancillary industry. It was during this period that auto components from India began to be exported. The entry of foreign automobile manufacturers ranging from Mercedes Benz, Ford, and General Motors to Daewoo following the government liberalizing the foreign investment limits saw the beginning of the third phase of the evolution of the industry. The auto ancillary industry witnessed huge capacity expansions and modernization initiatives in the post liberalization period. Technological collaborations and equity partnerships with world leaders in auto components 18

19 became a common affair. However, the tough competitive scenario saw a lot of consolidation in the industry and it still continues unabated. In , automobile sales are expected to grow by around 12 per cent in value-terms, driven mainly by favourable demographic trends, anticipated growth recovery in commercial vehicles and robust export growth. Consistent growth and dedication have made the Indian automobile industry the second- largest tractor and two-wheeler manufacturer in the world. It is also the fifth-largest commercial vehicle manufacturer in the world. It is also the fifth-largest commercial vehicle manufacturer in the world. The Indian automobile market is among the largest in Asia. The key players like Hindustan Motors, Maruti Udyog, Fiat India Private Ltd, Tata Motors, Bajaj Motors, Hero Motors, Ashok Leyland, and Mahindra & Mahindra have been dominating the vehicle industry. A few of the foreign players like Toyota Kirloskar Motor Ltd., Skoda India Private Ltd., Honda Siel Cars India Ltd. have also entered the market and have catered to the customers needs to a large extent. Not only the Indian companies but also the international car manufacturing companies are focusing on compact cars to be delivered in the Indian market at a much smaller price. Moreover, the automobile companies are coming up with financial schemes such as easy EMI repayment systems to boost sales. There have been exhibitions like Auto-expo at Pragati Maidan, New Delhi to share the technological advancements. Besides, there are many new projects coming up in the automobile industry leading to the growth of the sector. The Government of India has liberalized the foreign exchange and equity regulations and has also reduced the tariff on imports, contributing significantly to the growth of the sector. Having firmly established its presence in the domestic markets, the Indian automobile sector is now penetrating the international arena. Vehicle exports from India are at their highest levels. The leaders of the Indian automobile sector, such as Tate Motors, Maruti and Mahindra and Mahindra are leading the exports to Europe, Middle East and African and Asian markets. The Ministry of Heavy Industries has 19

20 released the Automotive Plan , with the motive of making India the most popular manufacturing hub for automobiles and its components in Asia. The plan focuses on the removal of all the bottlenecks that are inhibiting its growth in the domestic as well as international arena. The Future Growth Drivers: India's huge geographic spread- Mass Transport System. Increasing Road Development. Increasing disposable Income with the service sector. Replacement of aging four wheelers. Graduating from two wheelers to four wheelers. Increasing dispensable income of rural agri sector. Growing Concept of Second Vehicle in Urban Areas. 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 we 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. 20

21 Firstcall India Equity Research: B. Harikrishna Banking B. Prathap IT A. Rajesh Babu FMCG C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods E. Swethalatha Oil & Gas D. Ashakirankumar Automobile Rachna Twari Diversified Kavita Singh Diversified Nimesh Gada Diversified Priya Shetty Diversified Tarang Pawar Diversified Neelam Dubey Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO s, QIP s, F.P.O s, Takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions (domestic and cross-border), divestitures, spin-offs, valuation of business, corporate Restructuring-Capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and Other international stock exchanges. For Further Details Contact: 3rd Floor, Sankalp, The Bureau, Dr.R.C.Marg, Chembur, Mumbai Tel.: / / Telefax: info@firstcallindiaequity.com 21

Amara Raja Batteries Limited

Amara Raja Batteries Limited BUY CMP: Rs. 161.00 Date: December 11 th, 2009. Key Ratios: Particulars FY09 (12 m) FY10E (12 m) FY11E (12 m) OPM (%) 13 23 23 NPM (%) 6 12 13 ROE (%) 20 31 26 ROCE (%) 20