Multiple Growth Drivers Ahead
We initiate coverage on Jamna Auto Industries (JAI) with a Buy rating and a 12-month target price of Rs99 (18x September 2020E earnings), up 33% from the current market price, as we expect it to report a strong 21% earnings CAGR over FY18-FY21E backed by:
1) Broad-based growth in domestic commercial vehicle (CV) industry over FY19-FY20E, which will directly impact demand for the company’s products.
2) JAI’s first-mover advantage in introducing non-conventional (parabolic) springs which will improve its margin profile in the coming two years. 3) Rising proportion of revenues from the replacement market and new products such as lift axle and air suspension helping in diversifying its sales mix. JAI is among the largest leaf spring manufacturers globally with a production capacity of 240,000tn/year.
It enjoys ~70% OEM market share and will be a key beneficiary of the sustained strong performance of the commercial vehicle (CV) industry. Premium product mix and improved revenue mix in the high-margin after-market segment coupled with better operating leverage will result in ~70bps margin expansion, driving a strong 21% earnings CAGR over FY18- FY21E.
With return ratios of >30% and strong free cash flow generation, JAI is a quality play on the domestic CV industry. We have assigned Buy rating to JAI with a target price of Rs99 (18x Sept. 2020E EPS). We expect it to register FY18-FY21E revenue/EBITDA/PAT CAGR of 19%/21%/21%, respectively.
Key beneficiary of CV industry growth:
We see multiple demand drivers that will propel double-digit volume growth for domestic CV industry in the next two years, including pre-purchases on account of migration to BS-VI emission norms, shift towards high-tonnage vehicles, and rising government spending on infrastructure projects. We note that FY18 witnessed a strong uptick in industry-wide sales following a subdued operating environment in FY17 with JAI being a key beneficiary of the same, registering 34% YoY sales growth.
We foresee an uptrend in CV demand over FY19/FY20 and believe that JAI is structurally well placed to reap the benefits of the same. We also note that JAI has significantly outperformed the MHCV industry growth rate because of a changing product mix and increased content per vehicle in the CV category. The medium and heavy commercial vehicle (MHCV) industry is witnessing a shift towards rising share of higher tonnage commercial vehicles (> 25tn) as it is more profitable for fleet owners. Increased demand for higher tonnage CVs will result in robust demand for parabolic springs and lift axles in the near future.
Rising share of high-margin products to drive growth:
JAI’s volume sales largely comprise spring leaves which accounted for ~90% of total sales in FY18, of which the share of the more profitable parabolic leaves was ~25% (~17% in FY15). Apart from these, it has also introduced lift axle and air suspension products which now contribute ~10% to revenues, up from low single digit contribution in FY15. Going forward, the management is targeting to increase its revenue contribution from new products like parabolic leaves and lift axles.
De-risking revenue mix to reduce OEM dependence:
JAI has been focusing on the high-margin replacement and export markets to reduce its exposure to the cyclical CV business. It has a large after-market presence for leaf springs in India where margins are higher when compared to sales to OEMs. The after-market business, post Goods and Services Tax (GST) implementation, is projected to be a big demand driver for the company and we accordingly factor in a 29% CAGR in after-market revenue over FY18-FY21E, resulting in its revenue share rising to 19% in FY21E from ~15% currently.
JAI’s stock price has outperformed the broader indices over the past few months on the back of strong volume and earnings growth and also healthy double-digit margins. The stock has been a strong performer over the past one year because of improved demand. With its leadership position in the OEM segment already established, JAI aspires to capture a larger share of replacement demand and exports, which are high-margin, earnings-accretive avenues. We forecast revenue/EBITDA/PAT CAGR of 19%/21%/21%, respectively, over FY18-FY21E and assign Buy rating to JAI with a target price of Rs99.
Valuation/stock price performance
JAI’s stock price has outperformed the broader indices over the past few months on the back of strong volume and earnings growth and also healthy double-digit margins. The stock has been a strong performer over the past one year because of improved demand.
We believe the improving macro-sentiment surrounding the CV industry will place JAI in a sweet spot as it will reap the benefits from:
1) Large foothold in OEM space.
2) Heightened focus on domestic/export after-markets. The stock currently trades at 13.5x September 2020E EPS, compared to its five-year mean of 13.1x. Given its leadership position and superior return ratios, we believe it deserves a higher multiple. We believe the company will continue to outperform the commercial vehicle industry’s growth and report strong 21% EBITDA/PAT CAGR, each over FY18-FY21E, led by 19% sales CAGR and ~70bps margin expansion.
We have assigned Buy rating to JAI with a target price of Rs99, up 33% from the current market price (20x September 2020 EPS).