Verdict: A Promising Autocomp

IPO Snapshot:

Sandhar Technologies is entering the primary market on Monday 19^th March 2018, to raise Rs. 300 crore via fresh issue of equity shares of Rs.10 each and an offer for sale (OFS) of up to 64 lakh equity shares by PE firm GTI, both in the price band of Rs. 327 to Rs. 332 per share. Representing 25.65% of the post issue paid-up share capital, total issue size is Rs. 512 crore at the upper end of the price band, of which, OFS portion is Rs. 212 crore. Issue is closing on Wednesday 21^st March and listing is likely on 2^nd April.

Company Overview:

Sandhar Technologies is one of the largest locking and rear view systems auto component maker in India, catering to two-wheelers, commercial vehicles, passenger cars, off-highway vehicles and tractor segments of the auto market, supplying auto components to 79 OEMs in India and overseas, from its 31 manufacturing factories across 8 Indian states, 2 in Spain, 1 in Mexico and 1 assembly unit in Poland. Many of company’s manufacturing plants are dedicated units for its customer and are located in client proximity across the country’s North, South and Western auto belt. Besides technical collaboration with Honda Locks (Japan) for door mirrors, door handles and key set and JEM Techno (Korea) for relays, it has established 6 JVs with many domestic and international partners such as JBM Auto, Han Sung, Jinyoung, Daewha. 

Company’s product basket comprises of safety and security systems, such as lock assemblies, mirror assemblies, cabins, aluminium spools, spindles and hubs, wheel assemblies, sheet metal components, dies and moulds, crane and tractor parts, plastic parts, such as door handles, panels for televisions, and cabinets for air coolers and handle bar assemblies. Hero Moto is the company’s largest client, accounting for ~30% of FY17 revenue of Rs. 1,627 crore, while TVS is the second largest accounting for 20% of revenue. Some other customers include Honda Cars (8% of revenue), Bosch (5%), Royal Enfield, Tata Motors, Ashok Leyland and Caterpillar. It is setting up 5 new units in India, which are likely to be commissioned over the next 6-8 months, augmenting topline. While exports account for 14% of annual topline, two wheeler OEMs make up for ~58% of the company’s revenue pie.

Financial Performance:

Historical growth has been healthy and consistent, with consolidated revenue surging at 9% CAGR from Rs. 1,160 crore in FY13 to Rs. 1,627 crore in FY17, while net profit attributable to shareholders growing faster at 20% CAGR, more than doubling from Rs. 19 crore in FY13 to Rs. 39 crore in FY17. On Rs. 152 crore EBITDA, margin of 9.4% was clocked in FY17. Due to high depreciation and interest outgo, net profit stood at Rs. 40 crore, leading to an EPS of Rs. 7.66. Replicating the auto sector growth in H1FY18, company’s financial performance was excellent with consolidated revenue rising to Rs. 989 crore, EBITDA margin strengthening to 10.5%, and net profit to Rs. 34 crore, translating into an EPS of Rs. 6.69, on current equity of Rs. 51.16 crore.

As of 30-9-17, company’s net worth stood at Rs. 331 crore, leading to a BVPS of Rs. 65. Its debt pile is steep at Rs. 473 crore, with cash balance of just Rs. 9 crore, resulting in high debt equity ratio of 1.4:1. However, post repayment of Rs. 225 crore from fresh issue proceeds, the ratio will moderate to 0.4:1, which is more comfortable. Company’s working capital management is good, while return on net worth (RoNW), which stood at 13% in FY17, improved to 10% in H1FY18 (not annualized) due to strong performance during first half of the current fiscal. 

Objects of Issue and Shareholding Pattern:

Fresh issue proceeds of Rs. 300 crore will trim high cost debt by Rs. 225 crore, while balance will be used for general corporate purposes. PE firm GTI Capital, holding 17.47% stake in the company since Dec 2012 at a cost of Rs 84 per share, is exiting 72% of its holding at a 32% IRR on its 5 year old investment. The PE investor will continue to hold 4.21% stake in the company, post IPO. Current promoter holding of founder Mr. Jayant Davar and family of 82.53% will drop to ~70% post listing.

Valuation:

At Rs. 332 per share, company’s market cap will be about Rs. 2,000 crore, while EV will be approx Rs. 2,240 crore, which leads to EV/EBITDA and PE multiples of 11x and 25x, based on H1FY18 annualised earnings. On one year forward estimates, these multiples are 9x and 20x respectively, which are in-line, as peers Minda Corp, Fiem, JBM Auto are ruling in PE multiple of 18x-24x range and at EV/EBITDA multiple of 7x-12x, on FY19E basis. Closest comparable is Minda Corp, which is a pan-India auto component player, with 28 plants in India and 6 overseas, annual topline of Rs. 2,500 crore, 46% revenue contributed by safety, security and restraint products, 10.2% EBITDA margin for 9MFY18, ruling at a market cap of Rs. 3,900 crore, FY19E EV/EBITDA of 12x and PE of 21x. Given Sandhar’s leadership position in two product verticals, diversified product mix and vast manufacturing capabilities, outlook on the company is positive.

Besides, its biggest customer Hero Moto has posted 20% YoY volume growth during Oct2017-Feb2018 period, as compared to 8% volume growth during April-Sept 2017 period. Likewise, its second largest customer TVS Motors has posted 22% volume growth for 5 months period Oct2017-Feb2018 vis-à-vis 14% YoY jump in volumes in H1FY18. Sandhar has also increased its exposure to Royal Enfield during H1FY18, providing healthy revenue visibility for H2FY18, if not for FY19. Newer capacities coming on board re-affirm this bullish outlook.

Rural demand uptick aiding two-wheeler and tractor sales coupled with investment revival witnessed in the CV space, position the company in a sweet spot to capture future growth opportunities. On a longer horizon, it is also gearing up to capture the prospects offered by adoption of BS-VI norms in India from 1-4-20.  

Conclusion:

Sheer count of geographically-spread manufacturing units and diversified product categories, catering to varied segments of the auto industry, act as natural entry barriers. Leaner balance sheet post listing and strengthening margins make the fundamentals strong. Topped with our bullish view on the auto component space, we recommend ‘subscribe’ to the issue.

Disclosure: No interest.