Stock Pick From The _________ Sector

Here Is Why:

• The company operates in the Fully Built Vehicle segment, which has a strong demand.
• It has entered into high margin segments like the replacement market and the railway refurbishment business.
• It has a strong network of dealerships to assist growth in the replacement market.

Commercial Engineers and Body Builders Company (CEBBCO) is the largest player in the fast-growing Fully Built Vehicle (FBV) segment,with an approximately 40 per cent market share. The company has been primarily catering to Original Equipment Manufacturers (OEMs) of Commercial Vehicles to build FBVs over the chassis. Lately, CEBBCO has spread its operations to more profitable businesses that include the FBV replacement market as well as wagons, coaches, refurbishment and components for railways.

Vehicles sold in the form of FBVs only (and not just the chassis) give OEMs the advantage of commanding a higher price on the product and benefit buyers with full funding, two per cent lower excise duty than on a chassis-based vehicle, extended warranty and by eliminating the need to go to a local garage. It stands true that the sales of commercial vehicles have been subdued over the last few quarters. However, the demand driven by both OEMs and buyers has supported CEBBCO’s topline, which has seen YoY growth in the range of 31.20-221.74 per cent in the last five quarters.

The replacement market, which the company has recently entered, has managed to make up 20.45 per cent of the total revenues in Q2FY13 as compared to 8.9 per cent in Q1FY13. This strong growth has been largely due to the company’s strong network of contacts on account of the promoter family being authorised dealers of Tata Motors in Uttaranchal, Uttar Pradesh, Madhya Pradesh and Chhattisgarh. This segment commands a margin of 30-35 per cent, helping CEBCCO’s EBITDA margins to surge by 760 basis points YoY to 20.3 per cent in Q2FY13. onsidering the growth seen in this segment, the company is likely to see an improvement in its margins in the coming quarters.

CEBBCO’s presence also extends to refurbishment and components for railways. It has been seeing increasing activity in this segment. In Q2FY13, the company completed the delivery of 247 wagons for `37.3 crore to Braithwaite & Co. The company has also signed an MoU with Stone Intermodal (SIPL) for supplying five rakes (250 trailers), which it will start delivering some time during Q4FY13.

Its production facilities are located at Indore, Jabalpur and Jamshedpur with a total FBV capacity of 30000 units per annum. Of this capacity, a third is fungible, wherein the company can hop between 10000 units of FBVs and 1200 wagons in accordance with demand. Additional capacity building for 10000 units of FBVs per annum is underway and expected to be operational in Q3FY13. The company has aggressive expansion on mind. CEBBCO has 100 acres of land at Jabalpur with only 20 acres under operation, which will prove to be an advantage. Overall, the company is currently running at 100 per cent capacity utilisation. In this classic case of demand exceeding supply, in Q2FY13, the company had to choose between catering to the replacement market or OEMs.

Over the past three years, CEBBCO’s topline has shown a CAGR of 58.79 per cent. Although the company hasn’t been giving out dividends so far, during Q1FY13, its board initiated a dividend policy of 20 per cent payout subject to a minimum PAT of `10 crore. In accordance with this, we estimate a dividend yield of at least three per cent in FY13. Given this dividend yield along with a PE ratio DS of 9.73x and the EV/EBITDA of 7.21x, the stock seems worth a buy.