Hindustan Composites Limited

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1 Hindustan Composites Limited BUY CMP: Rs Date: December 15 th, Key Ratios: Particulars FY09 (12 m) FY10E (12 m) FY11E (12 m) OPM (%) NPM (%) ROE (%) ROCE (%) P/BV(x) P/E(x) EV/EBDITA(x) Debt equity ratio Key Data: Sector Automobile Ancillary Face Value Rs wk. High/Low Rs /72.25 Volume (2 wk. Avg.) 2095 BSE Code V.S.R. Sastry Vice President Equity Research Desk vsrsastry@firstcallindiaequity.com Target price: Rs Market Cap. : Rs mn. SYNOPSIS Hindustan Composites Limited is a pioneer in the development, manufacture & marketing of Asbestos Industrial Products and Friction Materials in India for over 45 years. Composites, with its wide range of products suitable for a number of general and specialized applications, has been catering to the diversified needs of core sector industries, such as Railways, Engineering, Mining, Aerospace, Steel, Chemical, Petrochemical, Fertilizer, power generation, Ship building, Atomic Energy, Electrical, Oil exploration, Automotive, etc. The company is hopeful of achieving better results in the coming years with continued investment in modern equipment`s and would focus further on R & D. The company s net sales and operating profit are expected to grow at a CAGR of 16% and 36% over FY08 to FY11E. Share Holding Pattern: Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com Firstcall India Equity Advisors Pvt Ltd 1

2 Table of Content Content Page No. 1. Investment Highlights Company profile Company products Peer Group Comparison Key Concerns Financials Charts & Graph Outlook and Conclusion Industry Overview 14 Firstcall India Equity Advisors Pvt Ltd 2

3 Investment Highlights Result Updates (Q2FY10) For the second quarter, the top line of the company increased 26%YoY and stood at Rs mn against Rs mn of the same period of the last year. The bottom line of the company for the quarter stood at Rs.3.10mn from Rs.-5.10mn of the corresponding period of the previous year i.e., an increase of 161%YoY. EPS of the company for the quarter stood at Rs.0.56 for equity share of Rs each. Firstcall India Equity Advisors Pvt Ltd 3

4 Expenditure for the quarter stood at Rs mn, which is around 23% higher than the corresponding period of the previous year. Raw material cost of the company for the quarter accounts for 43% of the sales of the company and stood at Rs mn from Rs.92.00mn of the corresponding period of the previous year i.e., an increase of 10%YoY. Employee cost stood at Rs.27.00mn from Rs.21.20mn. and accounts for 11% of the revenue of the company for the quarter i.e., an increase of 27%YoY. OPM and NPM for the quarter stood at 8% and 1% respectively from 5% and -3% respectively of the same period of the last year. The company operates only one business segment, viz. fiber based composite products. Firstcall India Equity Advisors Pvt Ltd 4

5 Company Profile Hindustan Composites Limited incorporated on Jul. 01, 1964, develops, manufactures and markets asbestos industrial products and friction materials in India. Earlier known as Hindustan Ferodo, it got its present name on Feb. 24, The company is part of the Rasoi group, which is in the forefront of a globally competitive brand and marketing oriented business with group companies such as Rasoi, Rasoi Express, and J.L. Morrison (India). The ISO 9002 certified company manufactures friction material like automotive brake and roll linings, automotive clutch facings, automotive disc brake pads, railway brake blocks, friction sheets and industrial roll linings; industrial sealing and insulation products like jointing sheets, packing s, asbestos yarns, asbestos cloth, rubber proofed sheets, rubber proofed tapes, asbestos millboard sheets, asbestos millboard discs, compestos and limpet sheets; and recently added asbestos-free heavy duty commercial vehicle and passenger car brake linings, disc brake pads, roll linings and railway brake blocks. The manufacturing plants of the company are located in Paithan near Aurangabad, Bhandara near Nagpur, and Jalna in Aurangabad. In FY07, a new manufacturing facility to produce asbestos-free heavy commercial vehicle and passenger car brake linings was set up at the company`s Paithan plant. The company caters to the needs of core sector industries like the railways, mining, oil exploration, steel, chemical, aerospace, ship building, and automotive among others. It has a network of 165 exclusive distributors throughout India servicing more than 10,000 outlets. The company`s clientele includes Indian Railways, Indian Oil, Ashok Leyland, SAIL, NTPC, TATA, Hindalco, Mahindra, and Reliance Industries among several others. Products are exported to more than 30 countries including Latin America, Greece, Middle East and Southeast Asia. Manufacturing Plants & Product Group Paithan near Aurangabad Automotive Brake Linings for 4 wheelers Automotive Brake Linings for 2 wheelers Automotive Disc Brake Pads Railway Brake Blocks Bhandara near Nagpur Firstcall India Equity Advisors Pvt Ltd 5

6 Clutch Facings 1. Wet Mix 2. Moulded 3. Random Wound Industrial Roll Linings Jalna Aurangabad Industrial Textiles, Yarn, Cloth, Rope lagging, Proofed goods Compressed Jointing Sheets and Limpet Sheets Company products Friction Material Automotive Brake Linings Automotive Roll Linings Automotive Clutch Facings Automotive Disc Brake Pads Railway Brake Blocks Friction Sheets Industrial Roll Linings Industrial Sealing & Insulation Products Jointing Sheets Packing s Asbestos Yarns Asbestos Cloths Rubber Proofed Sheets Rubber Proofed Tapes Asbestos Millboard Sheets Asbestos Millboard Discs Compestos Limpet Sheets Firstcall India Equity Advisors Pvt Ltd 6

7 Sales Network 4 Regional Offices: Mumbai, New Delhi, Chennai & Kolkata. 7 Depots: New Delhi, Kanpur, Kolkata, Chennai, Bangalore, Hyderabad & Kochi. Resident Sales Officers located throughout India. 165 exclusive distributors throughout India, servicing more than 10,000 outlets. Firstcall India Equity Advisors Pvt Ltd 7

8 Peer Group Comparison Name of the company CMP(Rs.) (As on December 15 th,2009) Market Cap. (Rs. Mn.) EPS (Rs.) P/E (x) P/BV (x) Dividend (%) Hindustan Composites Limited Bosch Exide industries Motherson Sumi Amtek Auto Key Concerns Adverse Govt. policies Economic slow down. Highly competition Firstcall India Equity Advisors Pvt Ltd 8

9 Financials Results Update 12 months ended Profit and Loss A/C (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 Net Profit Equity Capital Reserves Face Value Total No. of Shares EPS Firstcall India Equity Advisors Pvt Ltd 9

10 Quarterly ended Profit and Loss A/C (Standalone): Value(Rs. in million) 31-Mar Jun Sep Dec-09E 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 Total No. of Shares EPS Firstcall India Equity Advisors Pvt Ltd 10

11 Charts Net sales & PAT P/E Ratio (x) Firstcall India Equity Advisors Pvt Ltd 11

12 P/BV (X) EV/EBITDA(X) Firstcall India Equity Advisors Pvt Ltd 12

13 Three months Comparative Graph BSE SENSEX Hind. composites Outlook and Conclusion At the market price of Rs , the stock is trading at x and x for FY10E and FY11E respectively. EPS of the company is expected to be at Rs.3.86 and Rs.5.16 for the earnings of FY10E and FY11E respectively. On the basis of EV/EBDITA, the stock trades at x and x for FY10E and FY11E respectively. The price to book value of the company is expected to be at 7.89 x and 7.08 x for FY10E and FY11E respectively. The company s net sales and operating profit are expected to grow at a CAGR of 16% and 36% over FY08 to FY11E. The company operates only one business segment, viz. fiber based composite products for last quarter. Firstcall India Equity Advisors Pvt Ltd 13

14 The company is hopeful of achieving better results in the coming years with continued investment in modern equipment`s and would focus further on R & D. We recommend BUY for this stock with a target price of Rs for long term. Industry Overview The Indian auto component industry is one of India's sunrise industries with tremendous growth prospects. From a low-key supplier providing components to the domestic market alone, the industry has emerged as one of the key auto components centres in Asia and is today seen as a significant player in the global automotive supply chain. India is now a supplier of a range of high-value and critical automobile components to global auto makers such as General Motors, Toyota, Ford and Volkswagen, amongst others. As per an Automotive Component Manufacturers Association of India (ACMA) report, the turnover of the auto component industry was estimated at over US$ 18 billion in , an increase of 27.2 per cent since It is likely to touch US$ 40 billion, increasing India s share in the global auto component market from 1 per cent to 3 per cent by Aided by a 7 per cent growth in the original equipment manufacturers (OEM) segment and an 8.5 per cent rise in exports and after-market segment, it is expected that auto ancillary production would grow by 8.2 per cent in , according to a report by the Centre for Monitoring Indian Economy (CMIE). Investments in the auto component industry were estimated at US$ 7.2 billion in and are likely to touch US$ 20.9 billion by In Tamil Nadu alone, nearly US$ 1 billion have been invested by some of the major trye companies, such as Apollo Tyres, ATC Tires, MRF, Dunlop and TVS Srichakra. Exports of auto components grew at the rate of 35 per cent during and touched US$ 3.6 billion in It is estimated to reach around US$ 20 billion-us$ 22 billion by During April-January , exports grew by 27.3 per cent to US$ 2.12 million. A majority of Indian exports are sent to Europe and North America. India will be the next destination for the Automotive Testing Expo to be hosted by UKIP Media at Hyderabad next year. The expo will now be an annual event for the country and will showcase latest technologies, including simulation, for new automotives and components. Indian companies are also expanding their footprints abroad. For instance, TVS Logistics, a part of the TVS group, acquired one of the largest after market logistics companies in the UK. The Firstcall India Equity Advisors Pvt Ltd 14

15 company will undertake an investment in excess of US$ million in Multipart Holding in the next 18 months in order to expand its operations in the UK and rest of Europe. Further, Coimbatore-based Elgi Rubber Company has formed a fully owned subsidiary company in Texas, US under the name of Elgi Rubber Company LLC, investing upto US$ 5 million on the venture. Destination India According to the Investment Commission of India, global automobile manufacturers see India as a manufacturing hub for auto components and are rapidly increasing the value of components they source from India due to: India's cost competitiveness in terms of labour and raw material. Its established manufacturing base. Makers of luxury cars are increasingly looking at making India a sourcing hub for components, besides using more local components in cars for the Indian market. BMW is likely to sign the first direct sourcing deal with local vendors by the end of this year. Skoda Auto India is looking at increasing localisation for its small car Fabia to over 50 per cent over the next two years. Mercedes Benz India expects growth in sourcing from India to continue at 10 per cent. Foreign Investments India enjoys a cost advantage with respect to casting and forging as manufacturing costs in India are 25 to 30 per cent lower than their western counterparts. Seeing the growing popularity of India in the automotive component sector, the Investment Commission has set a target of attracting foreign investment worth US$ 5 billion for the next seven years to increase India's share in the global auto components market from the existing 0.9 per cent to 2.5 per cent by Swiss auto clamps maker, Oeitker Group, has inaugurated the first phase of its manufacturing facility in India. It has invested US$ million in Phase I and hopes to start work on the second phase by the end of next year. The Tamil Nadu state cabinet recently gave clearance to the French tyre major, Michelin s proposal to set up a US$ million greenfiled project near Chennai, Tamil Nadu. A memorandum of understanding (MoU) has been signed by the US auto giant, Ford Motors, with the Tamil Nadu government to set up a unit with a capacity of 250,000 engines a year. Firstcall India Equity Advisors Pvt Ltd 15

16 German auto company, Volkswagen has commenced sourcing components from India for its Russian plant and is also looking at sourcing light systems, plastic-related items and metals for its European plants. Domestic Investments The market is so large and diverse that a large number of players can be absorbed to accommodate buyer needs. The sector not only has global players looking to invest and expand but leading domestic component companies are also pumping in huge sums into expanding operations. An auto park is coming up near Hyderabad with investments worth over US$ million from around 34 automotive ancillary units. This is in addition to a US$ million Greenfield project being set up by MLR Motors near the park. Moreover, Indian tyremakers are rolling out investment plans worth US$ 1.24 billion, due to the rising popularity of radial tyres in the commercial vehicles segment. Some other investments include: Apollo Tyres is to scale up investment at its upcoming radial tyre project at Oragadam in Tamil Nadu from US$ million to US$ million. Hero Motors will invest US$ million in association with Austrian firm BRP Powertrain for manufacturing automotive transmissions in India. Indian arm of Swedish automotive component maker SKF is investing US$ 30 million in a new ball bearings manufacturing plant at Haridwar. Policy Initiatives The government has taken many initiatives to promote foreign direct investment (FDI) in the industry. Automatic approval for foreign equity investment up to 100 per cent of manufacture of automobiles and components is permitted. The automobile industry has been delicensed. There are no restraints on import of components. The government has envisaged the Automotive Mission Plan 2016 to promote growth in the sector. It targets: Firstcall India Equity Advisors Pvt Ltd 16

17 Emerging as the global favourite in the area of design and manufacture of automobiles and auto components. Taking the output to US$ 145 billion, accounting for more than 10 per cent of the GDP. Offering additional employment to 25 million people by Looking Ahead With investments around US$ 15 billion slated for the sector over the next few years, the prospects for India's auto market are bright. Even though India's auto component industry has conventionally relied on exports for its profits, the domestic market itself is ripe with rapidly growing opportunities. Industry experts are hopeful that the country will be able to offset China and other Southeast Asian countries' traditional manufacturing advantage in the coming years, facilitating the industry's achievement of its targeted market value of US$ 40 billion by 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. Firstcall India Equity Advisors Pvt Ltd 17

18 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 Priya Shetty Tarang Pawar Neelam Dubey Diversified Diversified Diversified 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 Firstcall India Equity Advisors Pvt Ltd 18

Apollo Tyres Limited BUY. V.S.R. Sastry Vice President Equity Research Desk

Apollo Tyres Limited BUY. V.S.R. Sastry Vice President Equity Research Desk Apollo Tyres Limited BUY CMP: Rs.54.80 Date: February 15, 2010 Target Price: Rs.65.00 Market Cap. : Rs.27624.13mn. Key Ratios: Particulars FY09 (12 m) FY10E (12 m) FY11E (12 m) OPM (%) 8 16 16 NPM (%)