Buy With A Long-term Perspective - Jay Bharat Maruti

We have been recommending select auto and auto ancillary counters lately as factors such as auto slowdown and stock market correction look overplayed on the sector. Jay Bharat Maruti is one such auto ancillary counter that has fallen 71 per cent from its peak in December 2007. But we believe the counter isn't as bad as its fall and hence at CMP of Rs 26, one can buy from a long term perspective and there are various reasons for our belief. First and foremost, it should be noted that Jay Bharat Maruti (JBM) is a joint venture company formed with Maruti Suzuki (MSL). MSL currently holds 29.28 per cent stake in JBM and was formed with an aim to be a dedicated vendor for MSL's requirements. JBM manufactures metal sheets, welded assemblies, rear axles, exhaust systems etc. Even today MSL remains the main single largest customer for JBM. This we believe is a blessing in disguise for JBM as MSL is a market leader in the auto pack and the more aggressive MSL becomes, it would generate more business and growth for JBM. MSL continues to launch new variants and it is now launching 'A Star' very soon. MSL's A3 segment, which includes the new variants such as SX4, Swift, Dzire have been doing quite well and growing at 38.2 per cent, which is a good sign. To cater to this incremental demand JBM is already setting up a new plant at MSL Suppliers Park at Manesar. This set up would include axle manufacturing, welding and painting. Considering the fact that MSL has set an ambitious target of selling 1 million cars by 2010-11 in the domestic market and JBM's  expansion, things are looking quite bright for JBM in the coming years.

Besides, JBM is also looking at new customers beyond MSL, which will not only allow the company to de-risk its business but also push its growth further. That apart on the financial front JBM continues to perform as it has grown at 3 year CAGR of 16.56 per cent in the topline and 15 per cent in the bottomline. Even in the first half of FY09, JBM posted topline growth 14 per cent to Rs 356.25 crore (Rs 312.27 crore), though the bottomline fell 27 per cent to Rs 6.19 crore (8.58 crore) on account of increased depreciation cost. The company has consistent dividend track record of 17 years with FY08 dividend at 25 per cent, which results in to dividend yield of 5 per cent. On annualised basis for FY09, JBM could post topline of around Rs 712.5 crore, while bottomline could be around Rs 12.38 crore. At these estimates, JBM generates an EPS of Rs 5.70, thereby resulting in to PE of 4x, which looks quite a grab. In fact at market cap of mere Rs 54 crore, we feel the worst looks discounted in the price. Thus at market cap to sales 0.08x investors can enter this counter with a one-year price target of Rs 33.