INVESTMENT RESEARCH FUNDAMENTAL COVERAGE - FEDERAL-MOGUL GOETZE (INDIA) LIMITED

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1 INVESTMENT RESEARCH Dated : 12 th July 2017 BUY Price ` 569 Fair Value 680 Upside 20% Div Yield - Tenure 1 Year Sensex Nifty Group/Index FUNDAMENTAL COVERAGE - FEDERAL-MOGUL GOETZE (INDIA) LIMITED B Investment Rationale Largest manufacturer of pistons and piston rings in India. With widely recognized brands, superior technology and strong distribution network, company is well positioned to take advantage of the opportunities and withstand the market challenges. Company strives to create sustainable profitable growth by using superior technology and maintaining product quality and offering wide range of products at competitive prices, which will give it a competitive edge in the market. Government Initiatives Adding Spunk to the Company Stock Details M.cap (` in cr) 3165 Equity (` In cr) wk H/L ` / Face Value ` NSE code FMGOETZE BSE code Key Valuation Ratios RONW 11% P/E P/BV 4.7 EV/EBIDTA IN ` Key Financial Data EV (`in cr) BV (`in cr) NW(`in cr) EPS Share Holding Pattern Promoter 25% Others 75% GST- Bigger achievement for the sector GST may fuel growth in the USD 39 billion domestic auto ancillary industry following lower taxation of 18 % under the new regime. The industry is already reaping benefits of a favorable ecosystem in domestic market and increasing globalization of Indian auto suppliers. The tax benefit will be passed on to OEMs which will eventually drive expansion in auto demand. As per an Auto Component Manufacturers Association (ACMA) report, GST would open new prospects for the auto ancillary companies, (which is expected to grow in double digits this year). GST is expected to impact vehicle pricing, sourcing strategies, distribution costs, raw materials cost is expected to be marginally lower and dealer profitability. It is anticipated that consolidation of these facilities would be beneficial for the overall economic efficiency of the auto industry. SIAM expects the growth in auto industry to rebound to the pre-demonetization level through revival of the rural market and substantial increase in expenditure on infrastructure, which are two important factors for the growth of the industry. With the decline in the holding period of a vehicle from 5-6 years to 3-4 years, the inflow of used cars and commercial vehicles has gone up considerably. Also, easy access to finance options, greater participation of organized OEM backed players in used vehicle markets; higher number of aspiring buyers with improvement in standard of living and increased industrial activities, etc. is likely to create higher demand for the used-vehicle segment. This in turn is expected to impact the demand for new passenger vehicles and commercial vehicles in the future. In order to fight the increasing pollution, government has announced the implementation of Bharat Standard BS-VI by April 1, This as a huge opportunity and company has already started development work with some OEMs in India, on new engine projects. Federal-Mogul is currently producing many of the Euro-VI engine parts in Europe and for comparable engine standards in North America. In India, company expects to be prepared to supply the products meeting, BS-VI before the deadline fixed by the government. VALUATION (` In Cr except per share) FY 18Est. Earnings Equity Share Capital FV No. of Equity Shares EPS(FY18 Est.) Estimated P/E Ratio 44 Estimated Price/share 680 Corporate Governance Transparency Ratio's Year End Tax Rate % Receivable day Source: Google Div. Payout % Page 1

2 Quarterly & Yearly Results Analysis RUDRA SHARES & With BS-IV norms coming into effect, the vehicles cost is expected to be relatively higher than the previous BS-III compliant vehicles. The auto players overall cost of production will increase leading to impact on the overall demand of the automobile industry. Also, the fuel used in BS-III compliant vehicles cannot be used in the BS-IV vehicles Management expects a moderate growth in the automotive industry during the year due to softened raw material prices and new vehicle launches. Further, IMD has forecasted an above normal monsoon, which is a critical factor for the overall economic growth, including the automobile sector. Implementation of 7th pay commission by the Government and low interest rates are expected to give boost to the automobile sector. However, the depreciated rupee value and increased cost of technology and components would impact the growth of automobile sector. Reduction in excise duty rates towards GST implementation along with lower corporate and income tax will benefit the industry. The new uniform tax structure will create a robust business environment and help the industry to positively contribute for National GDP. PEER GROUP COMPARISON PEERS FEDERAL MOGUL PPAP AUTOMOTIVE TALBROS AUTOMOTIVE JBM AUTO *EPS is taken for FY 2017 CMP (in ` ) MRKT. CAP (in ` cry) EPS* (in ` ) P/E (X) PROMOTER % An Eye on the Quarterly numbers:- Revenue for the quarter stood at ` crore, growth of 17% compared to Q3 FY 17 Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) in Q4 FY17 stood at ` crore, up 44.05%. The company s EBITDA margin stood at a robust 17.16% in Q4FY17, as compared to 15% in Q4FY16. Earnings per share (EPS) for the quarter ended Q4FY17 stood at ` 4.19, as compared with ` 2.32 for the quarter ended Q4FY16. Graphical presentation Q4 FY & FY 2017 Results: Revenue EBITDA EBITDA % PBT PBT% PAT PAT % EPS Results Snapshot ` in crores Standalone Results Consolidated Results Quarter Ended % Change % Change Year Ended % Change Q4 FY 17 Q3 FY 17 Q4 FY 16 FY 17 FY % 4.95% % % 19.30% % 17.16% 13.98% 15.10% % 14.64% % 45.75% % 10.29% 5.97% 7.41% % 6.85% 39.43% % 80.34% % 6.78% 3.90% 3.95% % 3.58% 59.43% % 80.60% % Page 2

3 Industry Overview Automotive Industry, globally, as well as in India, is one of the key sectors of the economy. Due to its deep forward and backward linkages with several key segments of the economy, automotive industry has a strong multiplier effect and acts as one of the drivers of economic growth. The auto industry is highly competitive, consisting of organized as well as unorganized sectors and is highly fragmented with a significant number of small and medium-sized companies. because of which the business rules are changing to meet the tough competition prevailing in the industry. Innovation, technological up gradation and cost saving hold the key to success to meet the expectations of the exigent competitive circumstances. The Indian auto component industry has been navigating through a period of challenges. Market Size: Over the last decade, the automotive components industry has scaled three times to US$ 39 billion in while exports have grown even faster to US$ 10.8 billion. This has been driven by strong growth in the domestic market and increasing globalization (including exports) of several Indian suppliers. The Indian Auto Component industry is expected to grow by 8-10 per cent in FY , based on higher localization by Original Equipment Manufacturers (OEM), higher component content per vehicle, and rising exports from India, as per ICRA Limited. According to the Automotive Component Manufacturers Association of India (ACMA), the Indian autocomponents industry is expected to register a turnover of US$ 100 billion by 2020 backed by strong exports ranging between US$ 80- US$ 100 billion by 2026, from the current US$ 11.2 billion. Company Overview Federal-Mogul Goetze (India) Limited was established in 1954 as a joint venture with Goetze-Werke of Germany. Goetze-Werke of Germany is now owned by Federal-Mogul Corporation, a $6.3 billion global company and one of the leading manufacturers of automotive components in the world. Company manufactures world-class pistons, piston rings, sintered parts and cylinder liners covering a wide range of applications including two/three-wheelers, cars, SUVs, tractors, light commercial vehicles, OPPORTUNITY & THREATS OPPORTUNITIES:- The number of households earning over US$10,000 a year is expected to top 67 million by FY21, more than triple the current 21 million. More households will be purchasing a second car and the replacement cycle is likely to become shorter. BMI Research (Business Monitor International Fitch Group) expects private consumption to grow by an annual average of over 6% in real terms between 2016 and 2020, with more and more Indian residents choosing to buy new or used cars. Moreover, passenger car density remains extremely low in India at about 21 cars per 1,000 people, but will rise to 28.4 by 2020 (according to BMI Research) due to rising incomes, lower interest rates and greater availability of credit. The Country s falling interest-rate environment also provides further stimulus to auto sales. The Economist Intelligence Unit (EIU), expects growth in passenger-car sales to average over 8.7% a year in between FY17 to FY21. THREATS:- With positives like growing spending power, easy availability of finances and more or less benign fuel prices, the passenger vehicles industry seems to have a near conducive growth environment. However, the uncertainties surrounding the use of diesel engines and the looming judicial axe in the form of bans has led to automakers go back to the drawing board. Ban on the sale of diesel engine cars with a capacity of over 2 liters within the National Capital Region ( NCR ) means that OEMs will now have to expand their petrol vehicle offerings and look to offer smallersized diesel engines, in order to maintain their market share. The extension of this ban may negatively affect diesel vehicle sales, as the government seeks to address air pollution problems in the region. According to media reports, the NCR, which comprises Delhi and its satellite regions, is India s largest vehicle market and accounts for 5-8% of diesel vehicle supply. Sudden regulatory changes could prove to be dissuasive and would result in capping the shortterm growth potential of the industry. Page 3

4 Valuation Conclusion Company is well positioned to take advantage of the opportunities and withstand the market with widely recognized brands, superior technology and strong distribution network, challenges. Company strives to create sustainable profitable growth by using superior technology and maintaining product quality and offering wide range of products at competitive prices, which will give it a competitive edge in the market. GST would open new prospects for the auto ancillary companies, which is expected to grow in double digits this year and is expected to impact vehicle pricing, sourcing strategies, distribution costs, raw materials cost is expected to be marginally lower and dealer profitability. Also, various announcements made in the budget to address the structural issues plaguing the industrial and infrastructure sectors are gradually gaining traction on the ground. Investment by domestic and international auto component manufacturers into India reinforces positive outlook on the Country s auto component manufacturing market. A growing domestic market, favorable regulatory changes, and the positive export potential of auto components will see continued interest for auto parts suppliers in the Country over the coming years. Investment by domestic and international auto component manufacturers into India reinforces positive outlook on the Country s auto component manufacturing market. A growing domestic market, favorable regulatory changes, and the positive export potential of auto components will see continued interest for auto parts suppliers in the Country over the coming years. Estimating the share price of the company as per P/E valuation, putting the estimated P/E of FY18E at 44x & the estimated EPS at ` 15.59,the estimated share price for next 1 year tenure turns around to be ` 680. Therefore, we recommend to BUY. Page 4

5 Net Sales EBITDA Depreciation Op Income Misc.Inc (Exp.) Interest Exp EBT Taxes Net Inc(Reg) Extraord. Items Rep Net Inc EPS Adjusted EPS Quarterly Results (` in cr except per share) LTM Income Statement and Estimates ( ` in Cr except per share) E 2019E 2020E Net Sales Oth. operating Income Total Inc. from operations Operating EBITA Profit & Loss Total Inc. from operations TOTAL EXPENDITURE EBITDA Depreciation (93.41) (78.44) (79.28) (84.78) (87.70) (90.86) Rep. profit before othrinc., fin.cost,tax & excp. Item Goodwill amortization Rep. profit before othrinc., fin.cost,tax & excp. Item OTHER INCOME Profit from ordinary act. Before Fin.Cost,TAX & Exp.Items Net financials Interest income Interest expenses (33.41) (25.20) (16.12) (11.07) (9.12) (7.40) Net Financial Items (33.41) (25.20) (16.12) (11.07) (9.12) (7.40) Reported Pre-tax profit Reported Tax charge (28.48) (36.19) (44.63) (48.25) (55.35) (61.98) Reported Net profit Minorities P/L OF ASSOCIATE CO Rep. NP after min. Int Extra Ordinary income Rep.Net Income after extra ordinary items EPS and Dividend Dividend Paid Retained earnings Reported EPS DPS - originally declared Number Of Shares Opening Balance Issued during the Period Closing Balance FV Wtd. Avg. no. of shares Note:- The figures shown in the brackets means NEGATIVE. Page 5

6 BALANCE SHEET E 2019E 2020E Equity & Liabilities Shareholders' Fund Share Capital Reserves and Surplus Minority Interests Total Shareholders' Fund Non-Current Liabilities Long-term Borrowings Other Long term Liabilities Deferred Tax Liability Long term Provisions Total Non-Current Liabilities Current Liabilities Short term Borrowings Trade Payables Other current liability Short term Provisions Total current Liabilities Total Equity & Liabilities Assets Non-Current Assets Fixed Assets Tangible fixed Assets G/W On Consolidation Non-current Investment Long term Loans & Advances Other Non current Assets Deferred tax receivables Total Non-Current Assets Current Assets Current Investments Inventories Trade Receivables Cash & cash Equivalents Short Term Loans & Advances Other current Assets Total current Assets Total Assets Cash & cash equivalents Other int. bearing assets Interest-bearing debt Net interest-bearing debt Net gearing (%) 34.45% 24.21% 11.51% 6.14% 2.35% - Investments Tangible assets Gross capex (105.69) (111.26) (88.69) (96.76) (108.13) (113.00) Sale of fixed assets Net capex (103.16) (111.11) (88.69) (96.76) (108.13) (113.00) Depreciation tangibles (93.41) (78.44) (79.28) (84.78) (87.70) (90.86) Note:- The figures shown in the brackets means NEGATIVE. Page 6

7 CASH FLOW ANALYSIS E 2019E 2020E EBIT Depreciation Dep. (ex goodwill) Movement in Inventories (49.79) (0.79) (22.80) (19.31) (17.29) Movement in Debtors (18.00) (5.95) (15.19) (17.80) (17.91) Movement in Creditors (27.53) (20.38) (6.69) (22.35) Other W.C Increase/decrease (30.61) (3.18) Change in Working capital (51.14) (18.70) (58.37) (43.80) (57.55) Tax paid (28.48) (36.19) (44.63) (48.25) (55.35) (61.98) Operating Cash Flow Net interest (33.41) (25.20) (16.12) (11.07) (9.12) (7.40) Cash Earnings Gross CapEx (105.69) (111.26) (88.69) (96.76) (108.13) (113.00) Sale of fixed assets Net CapEx (103.16) (111.11) (88.69) (96.76) (108.13) (113.00) Free Cash Flow pre dividend (10.12) Dividend Free Cash Flow post Dividend (10.12) Net acquisition/disposals Net cash flow (10.12) RATIO ANALYSIS E 2019E 2020E Return on assets 7.61% 4.42% 6.89% 7.75% 8.32% 8.67% Return on equity 14.69% 8.48% 12.09% 12.15% 12.28% 12.09% ROCE 27.09% 12.53% 15.02% 14.33% 14.13% 13.96% EBIT Margin 7.13% 8.74% 10.77% 11.07% 11.92% 12.59% Pre tax margin 5.02% 6.85% 9.55% 10.27% 11.29% 12.10% Net Profit Margin 2.50% 3.58% 5.70% 6.27% 6.93% 7.45% Total asset turnover Fixed asset turnover Equity turnover Current Ratio Quick Ratio Cash Ratio Receivable Days Inventory Days Payable Days Conversion Cycle (Days) Financial Leverage Effect Debt to Capital Debt to Equity Note:- The figures shown in the brackets means NEGATIVE. Page 7

8 Disclosures & Disclaimers Disclosures : 1) Business Activity : Rudra Shares & Stock Brokers Limited is engaged in the business of providing broking services & distribution of various financial products. RUDRA is also registered as a Research Analyst under SEBI(Research Analyst) Regulations, SEBI Reg. No. INH ) Disciplinary History : There has been no instance of any Disciplinary action, penalty etc. levied/passed by any regulation/administrative agencies against RUDRA and its Directors. Pursuant to SEBI inspection of books and records of Rudra, as a Stock Broker, SEBI has not issued any Administrative warning to Rudra. 3) Terms & Conditions of issuance of Research Report: The Research report is issued to the registered clients. The Research Report is based on the facts, figures and information that are considered true, correct and reliable. The information is obtained from publicly available media or other sources believed to be reliable. The report is prepared solely for informational purpose and does not constitute an offer document or solicitation to buy or sell or subscribe for securities or other financial instruments for clients. 4) Disclosures with regard to ownership and material conflicts of interest : Sr. No. Disclosures Yes/No a) Rudra or its research analysts, or his/her relative or associate has any direct or indirect No financial interest in the subject company. b) Rudra or its research analysts, or his/her relative or associate has any other material No conflict of interest at time of publication of the research report. c) Rudra or its research analysts, or his/her relative or associates have actual/beneficial No ownership of one per cent or more securities of the subject company. 5) Disclosures with regard to receipt of compensation : Sr. No. Disclosures Yes/No a) Rudra or its associates have received any compensation from the subject company in the No past twelve months. b) Rudra or its associates have managed or co-managed public offering of securities for the No subject in the past twelve months. c) Rudra or its associates have received any compensation or other benefits from the subject No company or third party in connection with the research report. 6) Other Disclosures: Sr. No. Disclosures Yes/No a) The research analyst has served as an officer,director,employee of the subject company. No b) Rudra or its research analyst has been engaged in market making activity for the subject No company. c) Rudra or its or associates have received any compensation from the subject company in the No past twelve months. Page 8

9 Disclaimers: This Research Report (hereinafter called report) has been prepared and presented by RUDRA SHARES & STOCK BROKERS LIMITED, which does not constitute any offer or advice to sell or does solicitation to buy any securities. The information presented in this report, are for the intended recipients only. Further, the intended recipients are advised to exercise restraint in placing any dependence on this report, as the sender, Rudra Shares & Stock Brokers Limited, neither guarantees the accuracy of any information contained herein nor assumes any responsibility in relation to losses arising from the errors of fact, opinion or the dependence placed on the same. Despite the information in this document has been previewed on the basis of publicly available information, internal data, personal views of the research analyst(s)and other reliable sources, believed to be true, we do not represent it as accurate, complete or exhaustive. It should not be relied on as such, as this document is for general guidance only. Besides this, the research analyst(s) are bound by stringent internal regulations and legal and statutory requirements of the Securities and Exchange Board of India( SEBI) and the analysts' compensation was, is, or will be not directly or indirectly related with the other companies and/or entities of Rudra Shares & Stock Brokers Ltd and have no bearing whatsoever on any recommendation, that they have given in the research report. Rudra Shares & Stock Brokers Ltd or any of its affiliates/group companies shall not be in any way responsible for any such loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Rudra Shares & Stock Brokers Ltd has not independently verified all the information, which has been obtained by the company for analysis purpose, from publicly available media or other sources believed to be reliable. Accordingly, we neither testify nor make any representation or warranty, express or implied, of the accuracy, contents or data contained within this document. Rudra Share & Stock Brokers Ltd and its affiliates are engaged in investment advisory, stock broking, retail & HNI and other financial services. Details of affiliates are available on our website i.e.. We hereby declare, that the information herein may change any time due to the volatile market conditions, therefore, it is advised to use own discretion and judgment while entering into any transactions, whatsoever. Individuals employed as research analyst by Rudra Shares & Stock Brokers Ltd or their associates are not allowed to deal or trade in securities, within thirty days before and five days after the publication of a research report as prescribed under SEBI Research Analyst Regulations. Subject to the restrictions mentioned in above paragraph, we and our affiliates, officers, directors, employees and their relative may: (a) from time to time, have long or short positions acting as a principal in, and buy or sell the securities or derivatives thereof, of Company mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or profits. RUDRA SHARES & Phone: Page 9