May 19, 2018

Jamna Auto - Fundamental Analysis

About:
Jamna Auto Industries is an auto ancillary company catering to the Commercial Vehicle industry. The company is the largest manufacturer of leaf springs and parabolic springs which help in suspension. Globally, it occupies the third spot in the leaf and parabolic springs segment. The company traces it's roots to Yamuna Nagar, where in 1954 Mr. Bhupinder Singh Jauhar set up a small shop dealing in tapered leaf springs.

The company has its plants in Pune, Kanchipuram (Tamil Nadu), Yamuna Nagar (Haryana), Kharsawan (Jharkand), Krishnagiri (Tamil Nadu) and Bhind (Madhya Pradesh).

Management and Promoters:


Promoters have increased their holding from 43.92% to 47.88% between March 2015 and March 2018. The pledged shares have also reduced from 9.49% to 1.6%.


Product:

Leaf Springs are used in commercial vehicles (Video Animation).


The product-wise turnover and sales figures are as given in the table below:


Leaf springs continue to be the major product for the company, contributing ~ 90% of it's revenues. Lift Axle, introduced in FY13 has grown to Rs 42 Crores of annual sales. The company has maintained a fair capacity utilization level and has also increased it's capacity as given below:


Industry:

The Light Commercial Vehicle (LCV) and Medium & Heavy Commercial Vehicle (MHCV) sales move in sync with the economic growth and any slowdown in infrastructure and related sectors can impact sale volumes. The FY13 numbers were the highest post which the industry saw a prolonged period of low demand.


Last years base looks subdued to the slowdown in spending caused by Demonetization. However, the Supreme Court's orders made the switch to Bharat Emission - IV compulsory from April 1, 2017. This caused a big rush in March 2017 to buy the old models which were 8% to 10% cheaper. April 2018 saw the lowest monthly sales of CV's in over 7.5 years. The industry seems to have picked up growth in the last few months of FY18.

Tata Motors is the market leader with a > 51% market share


Financials:


Jamna Auto has improved it's margins which has resulted in the profits growing faster than the revenues. The revenue growth has been just 3% p.a. on a 5 year CAGR basis. The company has been converting it's profits into cash as well. The company has used cash for increasing capacity from 1,50,000 MTPA to 2,40,000 MTPA and has further reduced debt from Rs 182 Crores in FY12 to Rs 73 Crores in FY17.

The Net Sales grew 23.8% in the 9MFY18 period to Rs 1,126 Crores from Rs 910 Crores in 9MFY17. The EBITDA margin fell from 15.83% to 13.85% and the PAT margin fell from 7.69% to 6.98%. The raw material cost went up by 27.6% in this period. Spring steel flats make up 89% of the raw material consumed and around 55% of the total sales.

Valuation:

Auto Ancillary companies do not command high valuations because of their lack of pricing power, cyclical trends in demand. Apart from low bargaining power with OEMs, the companies face another uphill challenge with the unoraganized sector in the After market. "Jai" is the brand that Jamna Auto. sells in the After market.


Jamna Auto has trades at an elevated PE ratio of 33 in-line with the overall auto-ancillary segment which is expecting a recovery in commercial vehicle sales. The revenue growth has shown good recovery over the last 3 years but is still below it's 2012 figures. While the stock is not cheap at current PE levels, higher return ratios (ROCE and ROE) which have been improving over the last few years are keeping the high valuations intact.

Investors should be careful when they pay high valuations for companies in cyclical industries. One needs to be confident of revenue growth of > 15% coupled with stable / growing margins before paying such valuations.

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