With the automobile sector racing to make good the losses it suffered last year on account of a dip in demand, IPRL, an auto ancillary company is also all set to benefit from the spin-offs.
When the markets start to heat up or are not in a position to provide a clear signal, it is almost always advisable to find lesser-known counters that are expected to yield decent returns. Based on this approach, we are recommending herewith an automobile ancillary company called I P Rings (IPRL). The compelling reasons start from macro factors like good sales growth in the automobile sector, an impressive financial performance in H1FY10, consistent dividend payment history and a noteworthy outlook provided by the management.
Further, with global carmakers targeting India as a small car hub, it can safely be assumed that IPRL will be one of the major beneficiaries. Also, the company has not pledged its shares and this too can be counted as a positive element. On the valuation front, the counter may look expensive but its strong performance in H2FY10 is expected to bring valuations to better levels. We recommend that investors should buy the scrip at its current levels with a target price of Rs 90 in the next one year. [INSERT_1]
As regards the business composition, the company manufactures products such as piston rings, differential gears, pole wheels and other orbital cold formed components. But piston rings form for a major contribution to the topline with a share of more than 72 per cent. In FY09, the financial performance of the company got impacted in H2 on account of global and domestic economic turmoil. But with the Indian automobile industry showing signs of growth, IPRL has revived at a quick pace. This can be seen from the fact that in H1FY10, it posted a topline of Rs 33.30 crore and bottomline of Rs 2.71 crore as compared to Rs 31 crore and Rs 2.13 crore respectively in H1FY09. [PAGE BREAK]
Further, the company’s performance in H2FY10 is expected to be much better. According to the management, the order position appears to be near-normal and this certainly is a positive indicator. The company is confident that with the expected pick-up in the industry there will be improvement in capacity utilisation in both the divisions, leading to better results for the year 2009-10. Based on the anticipation of an improvement in demand, a much higher production target has been set for the current year, which the company is confident will lead to greater profitability.
As regards the other opportunities, the management has stated, “Since India continues to be the focus market for several automotive players, both global and domestic, for setting up new ventures, this will bode well for the company. This is particularly so in the passenger car segment wherein India is strongly emerging as a global hub for the production of small cars”. With its frontline position in the market, IPRL stands to benefit a lot. Taking the evolving scenario into consideration, the company is embarking on a strategy of innovation and has recently entered into a new technical aid agreement with Nippon Piston Ring Japan for the manufacture of physical vapour deposition (PVD) rings to meet the new emission norms for the latest models of automobile engines. As mentioned earlier, it has been a consistent dividend paying company and announced a dividend in FY09 despite taking a hit in the bottomline. Now with FY10 expected to be better, the dividend payment is expected to increase. On the valuation front, its CMP of Rs 76 discounts its trailing four quarter earnings by 41x and its EV/EBITDA stands at 8x. But this is on account of poor performance in H2FY09. With H2FY10 expected to be better, the valuations are expected to improve. Hence we recommend that investors should buy the scrip at its current levels with a target price of Rs 90.