In The Driver's Seat

Bharat Seats (BSL) suddenly caught our eye as the scrip has been quite active on the bourses lately and is up by almost 57 per cent in just two months, whereas the broader market is up by a little over 1 per cent. Why have investors suddenly taken a fancy for this little-known counter? We decided to probe further and an initial look at the financials showed that after a marginal dip in profits in FY09, BSL seems to have bounced back quite strongly in the first half of FY10, both in revenues as well as profits. With the initial data increasing our curiosity further, we decided to speak to the management of BSL to get an insight into the business.

 

And after a conversation with Rajat Bhandari, Vice President (Strategic Planning) and Sanjeev Kumar, CFO, BSL merits a second look and is worth keeping in one’s portfolio as we believe that it has the potential to yield good upside in the long term. Based out of Delhi, Bharat Seats is an auto ancillary company that manufactures and supplies seating systems. That apart, the company also manufactures moulded and luggage carpets. Its FY09 revenues stood at Rs 219.60 crore, of which over 94 per cent revenues came from the car seating systems, over 2 per cent from motorcycle seats and the balance from moulded carpets.

 

There are reasons why we believe this scrip will do well. First, it should be noted that BSL has an edge as it is a dedicated supplier of seating systems for Maruti Suzuki India (MSIL) and two-wheeler manufacturer Suzuki Motorcycle India (SMIPL). There are only two companies, namely BSL and Krishna Maruti that have been supplying seating systems to MSIL for the last 25 years. In fact, MSIL has a fixed supply ratio for them, wherein 59 per cent of its seating requirements come from Krishna Maruti while the balance 41 per cent from BSL. Thus, assured of volumes and business from MSIL, BSL provides good revenue visibility.

 

As for two-wheeler manufacturer SMIPL, BSL has been catering to 100 per cent its seating requirement. Thus, there is a direct correlation between the growth of BSL and its clients. The more its clients grow, the more business BSL stands to get. According to the latest numbers available, MSIL’s sales for the month of November 2009 increased by 66.6 per cent, while for the period April to November 2009 the increase was to the tune of 29.4 per cent. SMIPL’s sales for April to November grew by 41 per cent, while growth for the month of November was 47.66 per cent. Thus, with its clients doing well, BSL is naturally in a position to derive the positive spin-offs. In fact, both these companies hold 14.81 per cent stake each in Bharat Seats. The rest of the promoter holding is held by Sharda Motor Corporation and the Relan family.

 

Going forward, things do look even better for BSL as both of its clients are looking to expand their capacities. MSIL has already indicated that it expects to increase its production capacity by 75 per cent over the next five years from 1 million units.

According to media reports, SMIPL too is looking to almost double its production capacity to about 3 lakh units annually by the end of March 2010 from its current capacity of 1.7 lakh units. Thus, with such huge expansions slated by its clients it will provide ample impetus and natural growth for BSL in the coming years.

 

On questioning the company’s management about the possibility of MSIL adding a third vendor to the list, Bhandari said, “Right now we can’t comment on that but for the last 25 years there have been only two vendors who are supplying to MSIL and we being totally dedicated to Maruti, as of now there is no such possibility. However, you can put this question to MSIL.” Further, to match the client’s expansion and the anticipated demand, BSL is already expanding its capacities as well. The company has recently executed a capex of Rs 14 crore, which was used for importing a polyurethane cushion manufacturing machine from Japan.

 

This expansion was funded through a combination of debt and internal accruals. In fact, it is already looking at capex of Rs 10 crore for FY11, which would be used to put up another line for headrest, testing equipment and upgradation of assembly lines. All these will only help the company to cater to the rising demand in a better way, thereby driving its revenue growth further. However, the only area of concern about BSL is its margins, which are quite low. It should be noted that as on H1FY10 its operating and net margins stood at 2.39 per cent and 1.39 per cent respectively. Explaining this, Sanjeev Kumar said, “We are supplying 100 per cent to Maruti and so we are getting volumes over there. In such a case, when you are getting assured volumes, the OEMs insist on periodical cost reduction every year. Thus, the margins may get reduced but the volumes make up for it.”[INSERT_1]

 

However, the management expects its margins to grow since the launch of new models by its clients would involve a lot of research and development as also value addition. Hence BSL would be able to command better pricing for its product in the near future. “Actually price negotiation takes place on a regular basis but old models will always have lower value addition. We hope to get better valuations with the new models,” Kumar said. In terms of financials, BSL has bounced back quite well in H1FY10 and its topline increased by 55 per cent to Rs 158.60 crore (Rs 102.53 crore), while its bottomline increased by 284.48 per cent to Rs 2.23 crore (Rs 0.58 crore).

 

Considering the fact that BSL expects to sell 4,10,000 car seats (average price per seat is Rs 6,500), 1,50,000 motorcycle seats (average price per seat is Rs 320) and 4,50,000 moulded carpets (average price per seat is Rs 400), BSL could post total revenues in the range of approximately Rs 290-300 crore, while the profits could be Rs 4.03-4.17 crore for FY10. At these estimates it gives an EPS of Rs 1.33, thereby resulting in PE of 15x. On a market cap to sales basis, BSL looks cheap at 0.22x. This, we believe, is attractive and leaves room for upward movement of the scrip.

 

BSL looks much better than its peer Harita Seating Systems which, despite its diversified clients, has been posting losses. Besides, BSL has been a consistent dividend payer over the last 19 years and with its FY09 dividend of 25 per cent (FV of Rs 2), the dividend yield works out to 2.5 per cent. Thus, despite the run up in the scrip we still feel it’s a good buy at Rs 20 with a one year target price of Rs 26.