In Tune With The Auto Boom - Samkrg Pistons & Rings

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With the auto sector booming, the auto ancillary sector also appears to have considerably improved. We at DSIJ too have been recommending some select auto ancillary companies and one of them that can be added to the list is Samkrg Piston & Ring (SPRL).

This Hyderabad-based, low-profile company is basically into the production of pistons and piston rings. The company has a presence in all the three segments, i.e. original equipment manufacturers (OEMs), after-market and the export segment. There are several factors which make SPRL an attractive bet. First and foremost, though SPRL, like any other company, faced hardships in FY09, its topline grew marginally even while its profits dipped, but the company’s bounce-back in FY10 has been noteworthy. And now, with the auto demand expected to stay, a similarly strong performance cannot be ruled out in FY11 as well. Further, though the overall scenario has improved, SPRL still isn’t taking any chances and aims to de-risk its business by bringing about a balance in revenues in the ratio of 25:55:20 for its OEM, replacement and export market in the coming years. This has two-fold benefits.

First, it reduces dependency on a particular segment to drive growth and second, an increased focus on the replacement market will help the company improve its margins in the coming years. Currently, 22 per cent of its revenues come from exports while the balance is all domestic. SPRL is de-risking its overseas business by expanding into regions beyond the US and Europe such as Australia, Russia, etc.

If that isn’t enough, SPRL has an enviable list of clients which includes biggies such as Bajaj, LML, Hero Motors, Force Motors, TVS, Tata Motors, etc. Considering the fact that these companies are aggressively pursuing growth, it will directly create more opportunities for SPRL in the coming years.That apart, the auto sector has been growing at a five-year CAGR of almost 13 per cent, while vehicle penetration is almost doubling every five years. Besides, low vehicle penetration in rural areas and the rising incomes in both rural and urban sectors will create a good demand for vehicles in the near future, which in turn will create ample demand for companies such as SPRL. Besides, with India being said to become the next auto hub with international players setting up shops, it is bound to create new growth avenues for this enterprise. [PAGE BREAK]

Financially, performance for FY10 SPRL’s revenues increased by 33 per cent to Rs 132.93 crore (Rs 100.15 crore), while profits increased and there was a 59 per cent bottomline growth. At its CMP of Rs 78.65, the scrip is available at a PE of 10x and EV/EBITDA of 5x. Though this might look a bit steep, we feel that the scrip is getting a premium due to its brisk growth and in anticipation of a similar performance in FY11. Besides, with a FY10 dividend of Rs 4 per share results in a dividend yield of 5.19 per cent, this limits the downside and makes it for a good grab with a one year target of Rs 102.