Aluminium business sale to improve financials; maintain Buy

India Equity Research Engineering & Capital Goods January 1, 2019 Event Update Dynamatic Technologies Refer to important disclosures at the end of this report Aluminium business sale to improve financials; maintain Buy Emkay Your success is our success CMP Target Price Rs 1,498 Rs 2,052 ( ) as of (January 1, 2019) 12 months Rating Upside BUY ( ) 37.0 % Dynamatic Technologies (DYTC) has completed the sale process of its loss-making aluminium machining division by executing a Business Transfer agreement today with Hi- Tech Arai. DYTC is expected to receive a payment of ~Rs400mn for the transfer of all fixed assets relating to the Aluminium business of its automotive segment. The company will also receive a consideration of ~Rs55-65mn for existing inventories of the Aluminium business. DYTC s filings with the stock exchange indicates that the above-mentioned sales proceeds are above the book value of the assets transferred as part of the transaction. A few machineries (worth Rs80mn) that were not part of the above sale process have been redeployed in other divisions of the company. We believe that the sale of the Chennai-based aluminium machining division will help the company improve its PBT by ~ Rs240mn from FY20. We are maintaining our estimates and our Buy rating, with a SoTP-based target price of Rs2,052. Cutting losses by selling aluminium division: The sale of the loss-making aluminium machining division is likely to improve DYTC s financials from FY20 we expect the PBT to increase by ~Rs240mn p.a. from FY20. The division had been incurring EBIT losses of ~Rs150-200mn p.a for the past few years, which will not be part of DYTC s financials from 4QFY19. Our discussions with management indicates that proceeds from the sale will be mainly utilized for reducing long-term debt (~Rs4bn in 2QFY19) which should help reduce interest costs by ~Rs40-45mn from FY20. Positioning for profitable growth in ferrous division: After the sale of the aluminium division, the focus now shifts to enhancing the profitability of the ferrous foundries based in Erla, Germany and Chennai, India. For the past few years, DYTC used to undertake only the low-margin casting jobs at its Erla and Chennai foundries, while the high-margin machining processes were outsourced to overseas vendors. It is pertinent to note that the EBITM in the ferrous foundries stood at a meagre 2% in FY18. Going forward, DYTC will cease manufacturing low-margin casting products and would be offering higher-value casting-cum-machining solutions to its European customers. The company has recently commissioned a new machining facility in Germany and expects the full benefits (EBITM of 4-5%) of the changeover at the Erla foundry to be visible from FY20. Maintain Buy: The hydraulic segment is also expected to report strong revenue growth aided by the growth in farm mechanisation (tractors) and construction equipment. The company has received a price increase from its customers effective from 2QFY19. In addition, DYTC is in the process of adding new OEMs and expanding its wallet share with the existing OEMs by introducing new products. In the Aerospace segment, DYTC has incurred significant capex and the benefits are likely to fructify from 2HFY19. We expect Aerospace revenues to increase to ~Rs6bn in FY21 from Rs3.5bn in FY18, as execution gains pace and volumes increase across all major projects. Going forward, we expect the Automotive segment to report steady profit growth on increasing utilization at JKM Ferrotech and margin expansion at Erla foundry over the next few quarters. We are keeping our estimates unchanged, while maintaining our Buy rating with a SoTP-based target price of Rs2,052. Financial Snapshot (Consolidated) (Rs mn) FY17 FY18 FY19E FY20E FY21E Net Sales 15,061 13,997 15,978 17,321 19,311 EBITDA 1,653 1,324 1,770 2,195 2,599 EBITDA Margin (%) 11.0 9.5 11.1 12.7 13.5 APAT 239 7 322 752 1,010 EPS (Rs) 37.7 1.1 50.7 118.6 159.3 EPS (% chg) 94.5 (97.0) 4,366.6 133.8 34.3 ROE (%) 8.6 0.2 9.7 19.6 21.4 P/E (x) 39.8 1,319.2 29.5 12.6 9.4 EV/EBITDA (x) 9.4 12.1 8.8 6.9 5.5 P/BV (x) 3.2 3.0 2.7 2.3 1.8 Change in Estimates EPS Chg FY19E/FY20E (%) -/- Target Price change (%) NA Target Period (Months) 12 Previous Reco Emkay vs Consensus EPS Estimates FY19E BUY FY20E Emkay 50.7 118.6 Consensus 57.3 106.2 Mean Consensus TP (12M) Rs 1,869 Stock Details Bloomberg Code DYTC IN Face Value (Rs) 10 Shares outstanding (mn) 6 52 Week H/L 2,370 / 1,306 M Cap (Rs bn/usd bn) 10 / 0.14 Daily Avg Volume (nos.) 1,051 Daily Avg Turnover (US$ mn) - Shareholding Pattern Sep '18 Promoters 50.2% FIIs 13.4% DIIs 10.8% Public and Others 25.6% Price Performance (%) 1M 3M 6M 12M Absolute (4) (3) (8) (31) Rel. to Nifty (4) (2) (10) (33) Relative price chart 2325 2120 1915 1710 1505 Rs 1300-40 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Oct-18 Dec-18 Source: Bloomberg This report is solely produced by Emkay Global. The following person(s) are responsible for the production of the recommendation: John Perinchery john.perinchery@emkayglobal.com +91-022-66121374 Nilesh Soni nilesh.soni@emkayglobal.com +91-022-66121262 Dynamatic Technologies (LHS) % 10 0-10 -20-30 ED: ANISH MATHEW SA: DHANANJAY SINHA

Exhibit 1: Revenue and Profitability assumptions Segment Revenue FY2016 FY2017 FY2018 FY2019E FY2020E FY2021E Hydraulics 2,613 2,949 3,155 3,582 4,069 4,624 Growth -11% 13% 7% 14% 14% 14% Automotive 9,605 8,971 7,362 7,776 7,933 8,527 Growth -11% -7% -18% 6% 2% 8% Aerospace 2,698 3,458 3,564 4,620 5,320 6,160 Growth 4% 28% 3% 30% 15% 16% Others 21 14 4 - - - Growth 17% -36% -74% -100% 0% 0% Total 14,938 15,392 14,084 15,978 17,321 19,311 EBITM Hydraulics 9% 10% 9% 10% 11% 11% Automotive 2% 1% 0% 1% 3% 4% Aerospace 26% 27% 19% 20% 20% 20% Segment EBIT Hydraulics 242 292 273 344 438 530 Automotive 163 99 (12) 88 238 341 Aerospace 697 947 682 933 1,075 1,244 Others (214) (213) (183) (160) (160) (160) Total 887 1,125 760 1,205 1,591 1,956 Corporate expenditure - (0) (0) - - - Operating Income 887 1,125 760 1,205 1,591 1,956 OPM 6% 7% 5% 8% 9% 10% Other Income 50 58 58 50 58 68 EBIT 936 1,182 817 1,255 1,649 2,024 Interest expenses 728 784 744 760 492 470 PBT before exceptional 209 399 73 495 1,157 1,554 Exceptional Income/(Expenses) - (43) - - - - PBT after exceptional items 209 356 73 495 1,157 1,554 Taxes 86 160 66 173 405 544 Tax Rates (%) 41% 45% 90% 35% 35% 35% PAT 123 196 7 322 752 1,010 EPS 19.4 30.9 1.1 50.7 118.6 159.3 Exhibit 2: Valuation Summary (FY21) Segment FY2021 EBIT Multiple Valuation Hydraulics 530 8 4,442 Automotive 181 5 971 Aerospace 1,244 10 12,505 Total EV 17,918 Less: Net Debt 4,909 Equity Value 13,009 No of Shares 6 Value per share 2,052 ED: ANISH MATHEW SA: DHANANJAY SINHA January 1, 2019 2

Financials Exhibit 3: Revenues Rs mn % 25,000 20,000 9.3 14.2 8.4 11.5 15,000 2.6 0.8 10,000 (8.3) (7.1) 5,000 15,875 16,292 14,938 15,061 13,997 15,978 17,321 19,311 - FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Revenues (LHS) Y-o-Y Growth % (RHS) 25.0 15.0 5.0 (5.0) (15.0) Exhibit 4: EBIDTA and EBIDTAM Rs mn 12.7 13.5 % 3,000 10.3 11.0 11.1 9.3 9.4 9.5 2,500 2,000 1,500 1,000 500 1,629 1,514 1,411 1,653 1,324 1,770 2,195 2,599 - FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E EBIDTA (LHS) EBIDTAM (RHS) 15.0 5.0 (5.0) (15.0) Exhibit 5: PAT Rs mn 1,200 1,000 800 600 400 200 138 286 123 196 7 322 752 1,010 0 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E PAT ED: ANISH MATHEW SA: DHANANJAY SINHA January 1, 2019 3

Key Financials (Consolidated) Income Statement Y/E Mar (Rs mn) FY17 FY18 FY19E FY20E FY21E Net Sales 15,061 13,997 15,978 17,321 19,311 Expenditure 13,408 12,673 14,208 15,126 16,712 EBITDA 1,653 1,324 1,770 2,195 2,599 Depreciation 528 564 565 604 643 EBIT 1,125 760 1,205 1,591 1,956 Other Income 58 58 50 58 68 Interest expenses 784 744 760 492 470 PBT 399 73 495 1,157 1,554 Tax 160 66 173 405 544 Extraordinary Items (43) 0 0 0 0 Minority Int./Income from Assoc. 0 0 0 0 0 Reported Net Income 196 7 322 752 1,010 Adjusted PAT 239 7 322 752 1,010 Balance Sheet Y/E Mar (Rs mn) FY17 FY18 FY19E FY20E FY21E Equity share capital 63 63 63 63 63 Reserves & surplus 2,925 3,075 3,397 4,149 5,159 Net worth 2,988 3,138 3,460 4,212 5,222 Minority Interest 0 0 0 0 0 Loan Funds 6,804 7,102 6,812 6,512 6,212 Net deferred tax liability 288 251 251 251 251 Total Liabilities 10,080 10,491 10,523 10,975 11,685 Net block 7,593 7,927 8,012 8,057 8,064 Investment 7 6 6 6 6 Current Assets 5,447 6,175 6,428 6,998 8,169 Cash & bank balance 826 627 743 910 1,303 Other Current Assets 0 0 0 0 0 Current liabilities & Provision 3,209 3,698 4,004 4,168 4,636 Net current assets 2,238 2,477 2,424 2,830 3,534 Misc. exp 0 0 0 0 0 Total Assets 10,080 10,491 10,523 10,975 11,685 Cash Flow Y/E Mar (Rs mn) FY17 FY18 FY19E FY20E FY21E PBT (Ex-Other income) (NI+Dep) 341 15 445 1,099 1,486 Other Non-Cash items (2) 8 0 0 0 Chg in working cap 181 (476) 169 (239) (310) Operating Cashflow 1,176 880 1,766 1,551 1,745 Capital expenditure (1,812) (737) (650) (650) (650) Free Cash Flow (636) 143 1,116 901 1,095 Investments (6) 1 0 0 0 Other Investing Cash Flow 819 80 0 0 0 Investing Cashflow (942) (599) (600) (592) (582) Equity Capital Raised 0 0 0 0 0 Loans Taken / (Repaid) 846 298 (290) (300) (300) Dividend paid (incl tax) (1) 0 0 0 0 Other Financing Cash Flow (311) (32) 0 0 0 Financing Cashflow (250) (479) (1,050) (792) (770) Net chg in cash (16) (197) 117 167 393 Opening cash position 677 826 627 743 910 Closing cash position 826 627 743 910 1,303 ED: ANISH MATHEW SA: DHANANJAY SINHA January 1, 2019 4

Key Ratios Profitability (%) FY17 FY18 FY19E FY20E FY21E EBITDA Margin 11.0 9.5 11.1 12.7 13.5 EBIT Margin 7.5 5.4 7.5 9.2 10.1 Effective Tax Rate 40.1 90.2 35.0 35.0 35.0 Net Margin 1.6 0.1 2.0 4.3 5.2 ROCE 12.5 7.9 11.9 15.3 17.9 ROE 8.6 0.2 9.7 19.6 21.4 RoIC 13.4 8.1 12.4 16.2 19.3 Per Share Data (Rs) FY17 FY18 FY19E FY20E FY21E EPS 37.7 1.1 50.7 118.6 159.3 CEPS 121.0 90.2 139.9 213.9 260.8 BVPS 471.3 495.0 545.7 664.4 823.7 DPS 0.0 0.0 0.0 0.0 0.0 Valuations (x) FY17 FY18 FY19E FY20E FY21E PER 39.8 1,319.2 29.5 12.6 9.4 P/CEPS 13.3 17.8 11.5 7.5 6.1 P/BV 3.2 3.0 2.7 2.3 1.8 EV / Sales 1.0 1.1 1.0 0.9 0.7 EV / EBITDA 9.4 12.1 8.8 6.9 5.5 Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0 Gearing Ratio (x) FY17 FY18 FY19E FY20E FY21E Net Debt/ Equity 2.0 2.1 1.8 1.3 0.9 Net Debt/EBIDTA 3.6 4.9 3.4 2.6 1.9 Working Cap Cycle (days) 34.2 48.2 38.4 40.5 42.2 Growth (%) FY17 FY18 FY19E FY20E FY21E Revenue 0.8 (7.1) 14.2 8.4 11.5 EBITDA 17.2 (19.9) 33.7 24.0 18.4 EBIT 26.9 (32.5) 58.6 32.0 22.9 PAT 59.8 (96.3) 4,366.6 133.8 34.3 Quarterly (Rs mn) Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Revenue 3,229 3,517 3,720 3,790 3,699 EBITDA 341 336 478 414 426 EBITDA Margin (%) 10.6 9.6 12.8 10.9 11.5 PAT 33 1 124 83 79 EPS (Rs) 5.2 0.2 19.6 13.1 12.4 Shareholding Pattern (%) Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Promoters 50.2 50.2 50.2 50.2 50.2 FIIs 14.8 15.0 15.0 15.2 13.4 DIIs 12.4 12.2 10.9 10.9 10.8 Public and Others 22.6 22.6 23.9 23.7 25.6 Source: Capitaline ED: ANISH MATHEW SA: DHANANJAY SINHA January 1, 2019 5

03-Jan-16 01-Jul-16 28-Dec-16 26-Jun-17 23-Dec-17 21-Jun-18 18-Dec-18 Dynamatic Technologies (DYTC IN) RECOMMENDATION HISTORY TABLE Date Closing Price TP Period (months) Rating Analyst 26-Nov-18 1,609 2,052 12m Buy John Perinchery 16-Aug-18 1,621 1,965 12m Accumulate John Perinchery 05-Jun-18 1,690 1,965 12m Accumulate John Perinchery 16-Feb-18 1,702 2,253 12m Buy John Perinchery 20-Nov-17 2,067 2,622 12m Buy John Perinchery 18-Sep-17 2,188 2,613 12m Accumulate John Perinchery 31-May-17 2,606 3,396 12m Buy John Perinchery 14-Feb-17 2,953 3,540 12m Accumulate John Perinchery 15-Nov-16 2,900 4,134 12m Buy John Perinchery 04-Oct-16 3,144 4,134 12m Buy John Perinchery RECOMMENDATION HISTORY CHART 4150 3588 3026 2464 1902 1340 BUY Hold Sell Accumulate Reduce Price Target Price Source: Bloomberg, Company, Emkay Research ED: ANISH MATHEW SA: DHANANJAY SINHA January 1, 2019 6

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John Perinchery, CMA., CA john.perinchery@emkayglobal.com +91-022-66121374 ED: ANISH MATHEW SA: DHANANJAY SINHA January 1, 2019 8