Force Motors Limited

Transcription

1 Investment Summary Force Motors Limited Independent Equity Research February 2017 Equentis Wealth Advisory Services (P) Ltd Registered Office: 712, Raheja Chambers, Nariman Point, Mumbai India Tel:

2 Quantitative Factors - Checklist FORCE MOTORS LIMITED (FML) Sr. No. Aspect Required Criteria for Equentis 5x5 strategy FY11-16 Actual Value (Historical) Condition Met? (Y/N) FY16-21E Future Value (Forecasted) Condition Met? (Y/N) 1 Top-line CAGR 20-30% CAGR over 5-year period 14% N 22% Y 2 EBITDA CAGR 25-35% CAGR over 5-year period 14% N 30% Y 3 PAT CAGR 30-40% CAGR over 5-year period 25% N 27% N 4 RoCE At least 15% with increasing bias Average 7% with volatile numbers. RoCE has been in declining trend from FY However, in FY15 and 16 it has improved drastically delivering expansion of ~1100bps over past 2 Years. N 19% Y 5 D/E Ratio Around 1-1.5xs with declining bias Average 0.05xs with declining bias. The ratio has gone down ~650 bps over past 5 years Y 0.01 Y 6 Working Capital Intensity Less than 25-30% of net sales Average working capital is 6.5%. Y 7.5% Y 7 Dividend Payout 15-20% Average 11% N 10% N 2

3 Qualitative Factors - Checklist Sr. No. Aspect Comment 1 Management pedigree, track record and integrity 2 Ownership Profile 3 4 Business USP and Market Leadership Past strategies towards acquisitions, capital allocation, fiscal prudence, capital spends, cash flow mgmt, dividend payouts, bonus, concern for minority s/hs 5 Succession Planning FML s founder N.K. Firodia was a visionary, whose innovation resulted in the first auto rickshaw manufacturing facility in India in The Firodia family also introduced the Tempo, the threewheeled goods carrier; the Matador; the Luna; and scooters that were made by Kinetic Engineering in collaboration with Honda Motor Company. The promoters have an illustrious background and longstanding history and have to their credit several category creators in the Indian automobile sector. As on 31 st December, 2016, promoter holding in the company is 61.06%, of which there is NIL pledged stake. In fact, there was never any pledging of promoter stake. Over the past decade and half, promoter holding has steadily gone up from 50% levels to the current 61% level. Total Institutional shareholding has remained range bound between 5% and 7% over the past five years. Jupiter South Asia Investment Company has stayed invested in FML since 2010 while National Westminster Bank has stayed invested since FML s precision in engineering and advanced technical know-how can be gauged from its long association with German luxury carmaker Mercedes, which spans over nearly 2 decades. In 2015, FML further cemented its position as a niche player in the automobile space after German luxury carmaker BMW inked a deal with the company for procurement of engine and gearbox for cars to be sold in India. FML is the only company in the world to assemble engines for both Mercedes and BMW. FML is a company with near-zero debt on its books with total cash on books of Rs. 3.5bn as on 30 th September, While cumulative FCFF has been negative Rs. 6bn over past five years, it is because the company has invested nearly Rs. 10bn cumulatively as capex during the period for creating new capacities and expanding current ones. From negative levels in FY2013, RoCE has seen a consistent rise to 12% in FY16. FML has kept working capital intensity under check at 4 6% of net sales. The company has not taken any decision that goes against welfare of its shareholders. The Firodias have been running their automobile empire since 1947 spanning three generations. The automobiles business (previously under a different name) was started by Mr. N.K. Firodia, father of current Chairman of the company Mr. Abhay Firodia (age 72). The baton has been successfully passed on to his son, Prasan Firodia (age 37), who is the Managing Director of the company. The day-to-day management of the company is run by a team of professionals. Required criteria for Equentis 5x5 strategy met? (Y/N) Y Y Y Y Y 3

4 Highlights 1. Unique & differentiated product offering; key driver for growth in its LCV business FML focusses on the niche passenger segment of the LCV market wherein it has ~45% market share. Specifically, in the sub-5t segment it has an indomitable position with 70% share, driven by its Iconic brand Traveller. The latter has proven multi-purpose utility as school bus, tourist vehicle, ambulance and corporate commuter. 2. Versatility of Traveller with diversified end-user profile renders sustained strong topline growth visibility FML s Traveller is the most popular and diversely used utility vehicle in the country with market share of ~70% in the sub-5t segment. Its product offerings include Traveller, Traveller 26, Traveller School Bus, Traveller 26 School Bus, Traveller Ambulance, Traveller Royale, Traveller Shaktiman, Traveller Delivery Van, Traveller Delivery Van Wider and Traveller Smart Citibus which are collectively used as school bus, tourist vehicle, ambulance and corporate commuter with maximum seating capacity of 26. It has also forayed into defense, fire and rescue segment with the launch of paramilitary ambulances and emergency rescue vehicles. A huge chunk of revenues of FML (~ more than 50%) is derived from this Traveller segment. 3. Positive outlook on Tractor portfolio In tractor segment, FML has 2 strong brands Balwan and Orchard. Though this segment is small in revenue contribution, it has reported a growth of ~30% YoY in FY15 and 9% in FY16 in volumes. FML produces tractors in the range of 25 to 55 HP at its Pune facility, which has installed capacity of 15,000 units p.a. on a single shift basis (at Akurdi). Its 25 HP Orchard tractor has performed well and now the company is focusing on enhancing its penetration into higher horse power tractors from the Balwan range. Going ahead, with the normal monsoon witnessed this year and with expected revival in rural economy, the demand for tractors is likely to improve. The recent event of Demonetization occurred in the month of November, 2016 was likely to hamper the overall sale of vehicles in Indian markets for near term. As expected the domestic sales of FML declined by 34% MoM in November, However, strong recovery was witnessed in December, 2016 with 34% rise in sales units in domestic market owing to healthy demand. Management has guided sales of 40,000 vehicles in FY17 as compared to 33,000 vehicles sold in FY Strong traction from New Launches During FY16, FML has launched 2 large vans Traveller royal, Traveller Super and 4 stretcher ambulance. With Traveller Royal, FML is creating a new segment of luxury vans; which could be useful for providing service in Tier- II & Tier-III places where operating big luxury buses is not viable. FML also recently launched an Intra-City Smart City Bus for up to 21 persons. This is ideal as a feeder bus to and from the Metro stations in cities. While FML is a highly-acclaimed company in the commercial vehicle segment in India; now it is slowly gaining ground in the passenger vehicle segment as well. The company also brought back Force Gurkha Off-roader last year with major modifications. Now, it is planning to introduce another model in the MPV segment sooner by the end of this year probably. Rumors suggest that the upcoming Force MPV will be a Mercedes Viano based vehicle and it will come with an eight-seating option. We have an extremely positive view on volume outlook driven by the strength of its product portfolio. This is also a testimony to FML s engineering prowess and strong in-house product development capabilities. At the same time, it also reflects on the management s ability to understand diverse end-user needs for mobility thereby paving the way of being Category Creators. Last but not the least, being able to offer the products, at the right price point has ensured repeat success. 4

5 5. Humungous potential of Engine Assembly Business driven by huge demand potential of Luxury cars in India FML derives ~35% of its revenues from sub-contracting business, where in it assemble engines, axles and gear boxes for both Mercedes and BMW in India. It is the only company in the world to supply engines to two of the world's biggest luxury car makers and competitors. It has set up plants in Chennai and Pune for BMW and Mercedes respectively with an aggregate investment of Rs. 300cr. Overall, Management is very positive on this business and expects revenues from this segment to increase threefold in next 3 years. Given the increasing penetration and huge potential of luxury cars market in India, we expect FML to deliver strong revenues in sub-contracting business. Mercedes FML is supplying engines to Mercedes since 1997 for its C, E, S, GL and M class cars and SUVs. With a view to service huge order book of Mercedes, FML has recently setup new plant in Pune in 2016 with an annual capacity of 20,000 engines and 20,000 front and rear axles. Its Chakan plant has an annual capacity of 25,000 engines which also services Mercedes. BMW After servicing Mercedes for such a long period, FML also added BMW in its client base for subcontracting business. In 2015, it opened a plant in Chennai that produces powertrains and gearboxes for BMW with an investment cost of Rs. 200Cr. In this plant FML assembles diesel engines for the BMW s X1, X3, X5, 3 Series and 3 GT, 5 Series and 7 Series. This plant has manufacturing capacity of 20,000 units of premium engines which can be further expanded up to 50,000 units. 6. Other Revenue Driver Exports As on FY16, FML derives ~7% of its business from exporting its vehicles to countries in Middle East, Asia, Latin America and Africa. It is now looking at new export markets for selling its off-road vehicle Force Gurkha. The overall demand scenario in its export regions is quite healthy and with its continuous efforts, FML has managed to deliver 36% YoY growth in its exports sales units. 7. Strong Business Moat led by advanced in-house R&D capabilities FML has setup technology Centre at Akurdi for engine and vehicle testing where it works on design, development and upgradation of engine configurations in various displacements and capacities. It has managed to develop a complete range of engines with different capacities such as 2 litres, 2.6 litres and 3.2 litres which are in line with BS V and BS VI emission regulations. It is also developing light weight vans in T-2 range of Traveller vehicles and other seating capacities. FML has always focussed on strong research and development through which it can enhance its technologies and features regularly to service customers more efficiently. Valuation Basis the above explained growth opportunity and FML s strong competitive positioning; over FY16-21 our key estimates are as follows 1. Turnover increase by ~3xs. 2. EBITDA increase by ~4xs. 3. PAT increase by ~3xs. 4. Cumulative CAPEX USD221mn; Rs. 15,000mn. 5. Cumulative Free cash flows from operations of USD83mn; Rs. 5,615mn. 6. Cumulative Cash & Liquid Investments portfolio of USD53mn; Rs. 3,581mn. 7. Avg. RoCE north of ~20% with increasing bias. FML FY16 FY17E FY18E FY19E FY20E FY21E CAGR FY16-21E EPS (Rs.) % YoY (%) 15.1% 25.9% 30.6% 32.6% 32.5% P/E

6 Over the next months, we expect the stock has the potential of delivering ~65% - 95% returns - Particulars FY16 FY17E FY18E FY19E PAT (Rs. Mn.) 1,797 2,067 2,603 3,399 YoY (%) 15.1% 25.9% 30.6% EPS (Rs.) CMP (Rs.) 4,142 4,142 4,142 4,142 Current P/E (xs) Average EPS (Rs.) -- FY18E&19E Attach Multiple (xs) Case I Case II Price per share (Rs.) 6,832 7,971 Upside (%) 65.0% 92.4% Average Target Price 7,402 Average Upside (%) 78.7% Sensitivity of FY21 Target Price to different levels of EPS estimates and PE multiple FY-21 EPS sensitivity -5% -10% -15% 0% 5% 10% 15% FY-21 EPS est. (Rs. /-) ,459 6,119 5,779 6,799 7,139 7,479 7, ,751 7,343 6,935 8,159 8,567 8,975 9, ,612 8,159 7,706 9,065 9,519 9,972 10, ,473 8,975 8,476 9,972 10,471 10,969 11, ,765 10,199 9,632 11,332 11,898 12,465 13, ,057 11,422 10,788 12,692 13,326 13,961 14, ,918 12,238 11,558 13,598 14,278 14,958 15, ,071 14,278 13,485 15,864 16,658 17,451 18,244 Recommendation Review Price 13,371 CMP 4,142 Upside 223% Upside (xs) 3.2 FML forms part of our top conviction investment ideas with strong potential of delivering 3xs returns over current levels through FY21. Given the exceptional management pedigree, favourable sector outlook, significant competitive advantages and high potential for robust free cash flow generation, we are of the opinion, that apart from the strong near-term stock price appreciation, FML also has the potential of creating significant wealth and fits well into our 5x5 strategy. 6

7 Risks to the recommendation Any slowdown in Automobile industry especially in LCV segment can impact sales of the company. Also, delay in demand recovery from rural areas can impact tractor sales. Changes in Emission and Regulatory norms can negatively impact FML s business. Any slowdown in demand or dull phase in luxury cars segment or any reduction in import duties of luxury cars can impact its sub-contracting business. Any reduction in import duties in India can hurt FML. Near-term Catalysts Normalization in volumes once impact of demonetization settles around. As much discussed in public domain, FML is likely to launch a new model Viano in FY17 which may provide a good boost to the company in SUV segment. Upcoming state elections in large states like Uttarakhand & UP and other states like Punjab, Manipur and Goa are likely to be key demand driver for Vans and Buses in near term. Sensitivity Sensitivity of EPS CaGR over FY16-21 at different levels of Sales Volume CaGR and EBITDA Margin for FY21E EPS CaGR FY16-21E EBITDA Margins FY16-21E Volume CaGR over FY16-21E 27.16% 10.00% 12.50% 15.00% 17.50% 20.50% 22.50% 25.00% 27.50% 8.0% 1.71% 5.65% 9.37% 12.93% 17.02% 19.67% 22.89% 26.04% 9.0% 5.83% 9.64% 13.27% 16.76% 20.80% 23.42% 26.63% 29.78% 10.0% 9.40% 13.12% 16.69% 20.14% 24.16% 26.77% 29.98% 33.13% 11.0% 12.56% 16.22% 19.75% 23.18% 27.18% 29.80% 33.02% 36.18% 12.0% 15.40% 19.02% 22.53% 25.94% 29.95% 32.57% 35.80% 38.98% 13.0% 17.98% 21.57% 25.07% 28.49% 32.50% 35.12% 38.37% 41.56% 14.0% 20.35% 23.93% 27.43% 30.84% 34.86% 37.50% 40.76% 43.98% 15.0% 22.55% 26.13% 29.62% 33.04% 37.07% 39.72% 43.00% 46.23% Note - As can be seen in the Yellow highlighted cell above at ~20.5% sales volume CaGR over FY16-21E and ~12% EBITDA Margin for FY21E, we project EPS CaGR ~30% over FY

8 Financial Summary Particulars (Rs. Mn.) FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E 8 3yr CAGR (FY13-16) 5yr CAGR (FY11-16) 3yr CAGR (FY16-19E) 5yr CAGR (FY16-21E) Sales Volume 26,037 32,258 29,502 27,427 29,387 33,288 35,501 42,800 51,360 61,632 73, % 5.0% 15.6% 17.3% YoY 23.9% -8.5% -7.0% 7.1% 13.3% 6.6% 20.6% 20.0% 20.0% 20.0% Net Revenues 15,648 20,850 19,730 20,220 23,641 30,601 35,166 43,593 53,898 66,649 82, % 14.4% 20.8% 21.9% YoY 33.2% -5.4% 2.5% 16.9% 29.4% 14.9% 24.0% 23.6% 23.7% 23.7% GROSS PROFIT 4,663 5,436 4,905 5,350 6,490 8,132 9,944 12,642 15,900 19,995 24, % 11.8% 25.0% 24.9% YoY 16.6% -9.8% 9.1% 21.3% 25.3% 22.3% 27.1% 25.8% 25.8% 23.7% GP Margins 29.8% 26.1% 24.9% 26.5% 27.5% 26.6% 28.3% 29.0% 29.5% 30.0% 30.0% EBITDA 1,444 1, ,474 2,744 3,224 4,367 5,858 7,810 10, % 13.7% 28.8% 30.4% YoY -15.9% -55.4% 79.1% 51.9% 86.2% 17.5% 35.5% 34.1% 33.3% 32.6% EBITDA margins 9.2% 5.8% 2.7% 4.8% 6.2% 9.0% 9.2% 10.0% 10.9% 11.7% 12.6% PAT 586 8, ,016 1,797 2,067 2,603 3,399 4,506 5, % 25.1% 23.7% 27.2% YoY % -98.2% 435.5% 30.3% 76.8% 15.1% 25.9% 30.6% 32.6% 32.5% PAT margins 3.7% 39.5% 0.7% 3.9% 4.3% 5.9% 5.9% 6.0% 6.3% 6.8% 7.2% Per Vehicle Analysis (Rs/ unit sold) - Net Realization 489, , , , , , , , , , , % 6.1% 3.0% 3.0% YoY 8.5% 10.3% 2.6% 1.7% 7.8% 3.0% 3.0% 3.0% 3.0% 3.0% FCFF (518) (3,636) (2,284) (64) 605 (735) (856) (1,248) 683 3,074 3,962 Debt: Equity Asset turns RoCE 19.0% 6.5% -1.3% 1.0% 5.0% 12.3% 13.0% 15.7% 19.1% 22.5% 25.8% RoE 19.0% 111.6% 1.3% 6.5% 8.0% 12.8% 13.1% 14.6% 16.5% 18.7% 20.7% Net working capital/ Net sales 4.8% 8.8% 6.9% 6.7% 4.1% 6.0% 6.5% 7.1% 7.6% 7.9% 7.9% Capex/Net sales -9.8% -9.3% -17.0% -5.3% -4.7% -6.9% -8.5% -9.2% -5.6% -3.0% -3.6% EBIT/ Gross Interest Expense (1.9) Shares o/s (mn) EPS (Rs.) P/E EV: 51,693 52,370 53,624 53,112 50,385 46,997

9 Particulars (Rs. Mn.) FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E 3yr CAGR (FY13-16) 5yr CAGR (FY11-16) 3yr CAGR (FY16-19E) 5yr CAGR (FY16-21E) - M. cap 54,574 54,574 54,574 54,574 54,574 54,574 - Add: debt Less: cash and cash equivalents 3,186 2,509 1,255 1,767 4,494 7,882 EV/EBITDA BVPS ,001 1,125 1,266 1,444 1,676 1,984 2,392 P/BV Dividend payout - as % of PAT 13.1% 1.9% 31.7% 5.9% 7.8% 8.8% 10.0% 10.0% 10.0% 10.0% 10.0% 9

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