Auto Ancillaries Target Rs th d August Company Background. Jamna Auto. Prominent Market Share 11% 11% 66%

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1 Aug-9 Sep-9 Oct-9 Nov-9 Dec-9 Jan-1 Feb-1 Mar-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Jamna Auto CMP Rs Auto Ancillaries Target Rs th d August 21 Stock Info Market Cap (Rs cr) 541 Beta WK H/L 161.5/45.75 Ave. Daily Volume 1117 Face Value 1 BSE Sensex Nifty Company Background Incorporated as a partnership firm in 1965, Jamna Auto Industries is the largest manufacturer of tapered Leaf and Parabolio Springs for Commercial Vehicle in India, and 4 th largest in the world. The company manufactures auto parts and specialize in the manufacture of laminated springs for automobiles ranging from 3 kilograms to 2 kilograms. Parabolic springs, tapered leaf springs, coil springs, and stabiliser bars are used in suspension systems of automobiles. The company is wholly owned subsidiary of Jai Suspension Sytems Ltd. Reuters code Bloomberg code Shareholding Pattern JMNA.BO JMNA@IN Product Mix Promoters 44.75% Leaf Spring Multileaf Springs MF/Banks/Indian FIs 4.6% RI/NRIs/OCBs 34.28% General Public 16.36% Jamna Auto Suspension Products Parabolic Springs Relative Performance Jamna SENSEX Prominent Market Share 11% 6% 11% 66% Jamna Vikrant Friends Soni Auto Others Toyo Design & Engg. With 66% market share, Jamna Auto is India s largest CV spring manufacturer With capacity of 144, MT, the company fourth largest spring manufacturer The Indian and Global OEM market is growing at 8% and 6% p.a. respectively Overall CV market in India registered 35% growth in FY1 Sumit K Singh Tel: singhsumitkumar@gmail.com Website: Strong Joint Ventures The company has tied up with its immediate global competitor NHK Spring, Japan for technical solutions. It has also entered into JV with Nissho Iwai Corp, Japan and Allevard Ressorts Auto, France for manufacturing Page 1

2 Coil Springs and Stabilizer Bars for supplies to the car market in India. UD Truck Corp, Japan has already issued Letter-of-Intent to the company for the supply of leaf springs to its Japanese plant. Jamna has also engaged JIPM, Japan for adopting best manufacturing practices. Large Customer Base Commercial Vehicles Tata Motors Ashok Leyland Eicher Volvo Force Man TACO Hendrickson AMW Diamler Mahindra NAVISTAR Light Commercial Vehicles Force Motors Nissan Swaraj Mazda ISUZU Motor Vehicles Maruti Suzuki Ford Motor M&M Toyota General Motors Mercedes Future Plans The company has set-up a green field project at Jamshedpur with a capacity of 3, MTPA and is likely to be fully operational in late 21. This plant will help to capitalize on the rising demand for leaf & parabolic springs. Its Chennai plant in place with the capacity of 1,44, MTPA, the company is now planning to increase its capacity by setting up plants at Pune and Lucknow. Parabolic springs comprise 8% of the product mix of Jamna Auto. With increased awareness about the advantages of these kinds of springs, the company is sensing a major shift in OEM demand for parabolic springs. Hence, the company is planning to expand capacities for parabolic springs, which will result in higher contribution from this segment, and thus better margins. With technical assistance agreement with the Ridewell Corp, USA, the company has started manufacturing air-suspension and components. This new segment of air suspension system has been growing rapidly with the market size of 4 units per annum and will diversity the company s portfolio. The Central Government is planning to purchase 15, buses with air-suspension system. Being a dominant player in the market, Jamna Auto will be benefited. The company s exports activity is quite small. With increased production and diversified product -mix, the company will look at export market as well in future. Industry Overview Post global financial crisis, the industry has stabilized with original equipment manufacturers experiencing improvement in demand conditions. The springs demand for commercial vehicles in India is expected to grow by 8% annually for next 3-5 years. Given the increasing participation of Indian companies in exporting activities, the Indian automotive industry is going to be benefited with global market growing at 6% annually. The demand for commercial vehicles is increasing which is a healthy sign for the automotive and ancillary industry. Unorganized players have significant share in the replacement market. However, with the introduction of Goods & Service Tax, all the players will be on the same level and there will be big market for the organized players. Page 2

3 Financial Analysis % 7% 6% 5% 4% 2% 1% % -1% % 12% 1% 8% 6% 4% 2% % Net Sales Growth % Operating Profit OPM (%) The company witnessed a collapse in FY29 due to global recession when sales growth rate plummet to -3.11% from previous year. The Operating Profit Margin was down to 5.48% as compared to 12.31% in the previous year. However, things are improved now when sales growth registered was 23.57% and OPM was back to 1%+ range. The company reported net profit of Rs crore in the quarter Q1FY211 as against to net loss of 2.19% during the previous quarter Q1FY21. Sales rose 85% to Rs crore in the quarter Q1FY211 as against Rs crore during the previous quarter Q1FY % 8% 67.29% 15 6% 1 2% 4% 31.4% 33.22% % % -1% -2% 2% % -2% -4% 29.15% % 15.44% 19.71% 7.49% FY26 FY27 FY28 FY29 FY % % -2 PAT NPM (%) -4% ROCE (%) ROE (%) The company experienced 26% reduction in interest cost Rs crore in FY21 compared to Rs crore in FY29. The company s current Return on Equity of 33.22% is much higher than that of its competitors: 19.94% of Remsons Ind. and 1.66% of Frontier Springs. Again, current Return on Capital Employed of 27.58% is much higher than that of its competitors: 16.81% for Remsons Ind. and 14.77% for Frontier Springs. Page 3

4 Income Statement (in Rs. cr) FY26 FY27 FY28 FY29 FY21 FY211E FY212E Net Sales , Other Income Operating Expenses ,68.42 Operating Profit Interest Depreciation Deferred Revenue Exp PBT Taxation Deferred Tax Credit PAT The company has registered growth rate of 26% CAGR in topline and 95% CAGR in bottomline in last five years. Given the strong order book and dominant share in ancillary sector, I expect the company to continue its dream run on the back of strong fundamentals and good management. The operating expenses have come to 271 bps w.r.t. total income in last five years. I expect to see further 25 bps improvement in next two years, which will further improve the margins. The topline and bottomline is expected to be around Rs. 95 crore and Rs. 46 crore in FY211 and Rs. 124 crore and Rs. 69 crore in FY212 respectively, resulting in Net Profit Margin of 4.87% and 5.57% respectively, which is better than that of FY21, 2.76%. Balance Sheet (in Rs. cr) FY26 FY27 FY28 FY29 FY21 Share Capital Reserves & Surplus Secured Loans Unsecured Loans Total Liabilities Net Block Capital WIP Investments Deferred Tax Current Assets Current Liabilities Misc. Expenditure Total Assets The loan component of the balance sheet has declined from 8 of the total assets in FY26 to 6% in FY21, which is a good amount of debt component in the balance sheet. The average Current Ratio for last five years is close to 1.34, which is better than Industry average of.79. Interest Coverage ratio of 8.27% puts the company s synthetic debt rating in A+ category with the default spread of.7%. The company s debt-equity ratio has improved drastically from 5.4 in FY26 to 1.9 in FY21. Page 4

5 Two-Stage FCFF Discount Model Valuation I believe that Jamna Auto will continue to register high growth rate for next 5 years on the back of huge order book and future expansion plans. Thereafter the growth rate will become in-line with nation s economy growth rate of 5%. To value the company, I believe Free Cash Flow to Cash Model will give a more comprehensive picture. FY21 FY211 FY212 FY213 FY214 FY215 Terminal EBIT Tax rate EBIT (1-t) Capital Expenditure Cng. in Noncash WC FCFF WACC 13.5% 13.25% 13.% 12.5% 12.% 11.% 1.5% Terminal 1, PV of FCFF Cumu. PV of FCFF in High growth phase PV of FCFF of Terminal Value of Firm Value of Operating Assets Value of Cash, Marketable securities Value of Firm Market Value of Debt Market Value of Equity No. of shares outstanding (cr) 3.65 Fair Value WACC Sensitivity Analysis Terminal Value 4.% 4.5% 5.% 5.5% 6.% 9.5% % % % % Jamna Auto Industries is trading at Rs. 144 per share on 25 th August, 21, which makes it highly undervalued given the calculated Fair Value of Rs. 173 per share. During the economic meltdown last fiscal year, the scrip took a hard beating when the bottomline plummet sharply. With FY21, the company is back on track and its fundamentals are look strong. The financials have recovered dramatically, signaling the market that the company is on its way to continue high growth in coming years. The Sensitivity Analysis suggests that even if we take a pessimistic view of the key parameters, i.e. cost of capital continue to be at the current level even after five years and terminal growth of the company be on the lower side, the Fair Value would still be equal to the Current Market Price of the scrip, which makes the scrip a safe bet. Investment Arguments On the back of strong demand in the commercial vehicle segments, expanding capacities & product portfolio, adding more location & markets and improving efficiencies, Jamna Auto is likely to show significantly better bottomline performance in next six quarters. The company expects its order book to jump significantly in favor of parabolic springs, thereby giving a significant fillip to its profitability. After taking the beating in the FY29, the scrip has recovered substantially but still there is lot of steam left. The company is currently trading at 31.13x TTM P/E. At estimated Forward EPS of Rs , the company is trading at 8.87x forward P/E, which indicates a highly undervalued scrip. With the 2-year estimate of PAT growth as 19% CAGR, at current P/E, the PEG ratio stands at.28, which again states that the scrip is highly undervalued. Page 5