An old, well entrenched, niche auto component maker, doing great during the lull period in auto industry and getting better by the day. Highly undervalued given the possibilities ahead. Strong chance of fast rerating as Mr. Market identifies the potential.
Steel Strip Wheels Ltd. (SSWL) Designs & manufacture automotive steel wheels since 1991 and is a leading supplier to Indian & Global Automobile Manufacturers. Their product range comprises Steel wheels for Two and Three Wheelers, Passenger cars, Multi utility vehicles, Tractors, Trucks & OTR ( Off the Road) Vehicles.
SSWL is having combined installed capacity of about 17mn wheels across three plants in India.
SSWL Mother Plant is located in North India (Dappar, Punjab) dedicated for 2 & 3 wheeler, passenger Car, MUVs & tractors segment vehicles. The installed capacity of the mother plant is 9mn wheels.
Commercial Vehicles Wheel plant is on eastern coast of India (Jamshedpur, Jharkhand) closer to Steel source, Tata Steel. This plant has installed capacity around 2mn wheels.
SSWL delivers LCV, HCV & OTR wheels from this facility with a capacity of 2mn wheels. Passenger Car wheel plant is on southern coast of India (Chennai, Tamilnadu) to meet the Exports demand to Europe & South America with a capacity of 6mn wheels.
SSWL delivers the best in class steel wheels to all major Automobile manufacturers in India and caters to widest range of vehicles manufactured in the country.
SSWL is also a supplier to global OEMs and delivers to countries like Russia, Brazil, Thailand, Japan, Germany, Romania, France, UK, Morocco & Italy.
SSWL business: A niche business with a great and satisfied client base
- SSWL caters to all the major Indian as well as Global OEM’s or their steel wheel requirement.
- Passenger Cars: SSWL is a leading Passenger Car wheel manufacturer in India supplying wheels to Maruti Suzuki, VW, Renault-Nissan, Mahindra & Mahindra, Tata Motors, Honda Motors and Hyundai Motors.
- Tractors: SSWL supplies Tractor wheels to all the Tractor manufacturers in India including New Holland, Mahindra & Mahindra, Tafe tractors, John Deere, Escorts, Sonalika Group.
- Commercial Vehicles: SSWL make both Tube type and Tubeless wheels with Flow forming technology for CV segment. CV wheels are supplied to Tata Motors, Daimler, Ashok Leyland, Ashok Leyland-Nissan and Swaraj Mazda.
- OTR: SSWL also supply OTR wheels to JCB , Larsen & Toubro & BEML.
- Exports: Internationally, SSWL cater to PSA Peugeot Citroen (France & Spain), BMW (UK, Germany & Netherland), VW/Audi (Germany & Argentina), Piaggio (Italy), Siam Kubota (Thailand and Japan), Kromag (Austria), Just (Germany) and SWTI (Slovakia), Renault Nissan Group, SSangyong Motors-Korea, CIR Merker-Italy. Recently they have bagged an order to supply to Land Rover and Jaguar.
The strong fundamentals:
- Steady growth over last 5 years. (5 years sales growth CAGR 22.4%, % years profit growth CAGR 21.6%)
- Ok return ratios (Return on equity: 11.94%). Will better from here. Will explain why little later.
- Little higher debt but very comfortable debt servicing ability (Debt to equity: 1.82, Interest Coverage Ratio: 2.69)
- High promoter holding 59.13% (Promoter holding going up, big institutional holding accounting to around 20%. Tata Steel holds 7.57%, Priya tools hold 3.47%) and low float for retail buyers (only 20%). No big institutional investor or DII holding as yet
- High reserve of 330 crs for the market cap of 489 Crs
- Very solid cash flow (Operating cash flow positive for last 10 years. I have seen very few companies to achieve this feat. )
- Constantly reducing debt
- Great repeat order flow. ( Check announcement section in BSE)
- Not skipping dividends
The evolving SSWL:
The annual reports of SSWL talks very vocally about their focus on bettering margins and efforts are visible in numbers.
Efforts undertaken for higher Margins:
- SSWL in bringing in efficiencies across the major cost heads with clear focus on adopting the best practices across all area of its operations. SSWL continues to embark on path of balance sheet deleveraging and last year repaid long term loan of Rs70cr. Company is putting in ongoing effort to cut down on net debt in its books. This deleveraging exercise will start to yield results in terms of lower financial leverage and reduced financial cost from current years onwards
- Company recently Commissioning of State of the Art wider Hot rolled Coils Slitting Line which will start from Jan 2016 and would end in 4 months. This will further reduce processing losses and would reduce inventory to overall reduce input cost further. Company was outsourcing this till now.
- Debottlenecking exercise across all the facilities is being carried every quarter. Optimum scheduling of production across different products thereby improving yield.
I like the companies which walks the talk. The efforts given above are very visible in the recent numbers. Though last year top line saw a 13% growth, bottom lines experienced a whopping 62% growth. Last year had been bad for car industry and in trailing 12 months company registered only 0.25% sales growth but profits grew by a whopping 71.84%.
SSWL came up with a blockbuster Q3 with a sales growth of around 5.5% and profit growth of 62%. However it was mistimed with the market fall and prices came down to very attractive levels.
- Margin will improve even further this year owing to following reasons giving a further phillip to profits
- o Low steel input cost this year
- o Hot rolled Coils Slitting Line ( As it starts operating)
- o Devaluating money
- o Lower interest burden
- Automobile industry is experiencing a lull for last 3 years. Any uptick in automobile sales will do magic for the company.
- o Capacity utilization of 70%. With higher sales margin will again grow. Also no need for any capex in near future.
- o Steady and high GDP growth can change fortune of automobile sales
- o Govt. mulling banning of more than 15 years old vehicles. This can playout as a fortune changer for SSWL along with many in automobile sector.
- Steady reduction of debt. Last year company paid off 70cr loans.
- New orders from JLR
- New geographies to extend for export
Valuation and buy logic:
- Sales is 2.4 times more than that of Market cap, Enterprise value of around 1020 Cr and marjet cap is only 489Cr. Graham number is at 450
- PEG ratio is below 0.5
- Trailing 12 months PE stands only around 8.7
With great potential
- Well entrenched player with repeat orders from large OEMs
- Multiple triggers
- Expanding profit margin
Big rerating possibility:
- Stock is trading at only about 5 PE for estimated Fy17 EPS. The industry PE stands at around 26.
- So, even in a conservative estimate of around 13 PE ( Taking just half of Industry PE, Where as niche players like SSWL should get higher PE than industry average) in FY 17 a target price of 821 can be safely assumed.
- Kalink Co. ( A South Korean wheel maker) takes 2.08 lacs shares in preferential allotment at the price of 640 on 30.12.2015. This only indicates the future value would be greater than 640 and increases conviction on the pick.
Buy 60% at current price of 316. Trail rest 40% in price drops from here.
WE ARE NOT YET A SEBI REGISTERED RESEARCH ANALYST.
1. AT THE TIME OF WRITING THIS ARTICLE, THE WE DO NOT HAVE A POSITION IN THE STOCK COVERED BY THIS REPORT.
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3. WE DOES NOT HAVE ANY MATERIAL CONFLICT OF INTEREST AT THE TIME OF PUBLICATION OF THE IDEA.
4. WE HAVE NOT RECEIVED ANY COMPENSATION FROM THE SUBJECT COMPANY IN THE PAST TWELVE MONTHS.
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