5 December 2018

Sharda Motors Stock Analysis


The Relan family (Promoter group), owns 73.08% of Sharda Motors Stock. The company’s Managing Director is Ajay Relan while Sharda Relan (Mother of Ajay Relan) is the Co-Chairperson. The company started operations in 1986 and has it’s presence in the Auto Ancillary space. The main products of the company are Exhaust Systems, Suspension Systems and Seat Trim and Frames. Exhaust products make up 60% to 65% of the revenues.

  • Mahindra & Mahindra, Hyundai and Maruti Suzuki (Bharat Seats) make up 81% (Rs 928 Crores) of the revenues
  • Earlier M&M contributed ~45% of the revenues but now the top 3 have equal contribution
  • Auto ancillary companies have a weak bargaining power against the auto makers
The company has a ~ 28% stake in Bharat Seats Ltd. which is a JV between Suzuki, Maruti Suzuki and Sharda Motors. Sales to Bharat Seats contribute Rs 366 Crores to the revenues.

Industry Analysis

The passenger vehicle industry in India is expected to grow at 8%. Auto ancillary companies are expected to grow at 11% p.a. for the coming 3/5 years. Since FY14, most of the auto ancillary companies have grown their EBITDA margins. Sharda Motors has seen it’s margins expand from 7.41% to 13.44%, however, others have seen just a 100-300 basis points margin expansion.

Financials


  • The revenue growth has been in single digits over the last 3 / 5 years
  • The margin has expanded due to lower raw material cost
  • Depreciation and finance cost have reduced and aided PAT growth
  • The company has converted profits to cash and met capital expenditure through internal accruals
  • Sharda Motors had Rs 104 Crores worth of investments in mutual funds on 31st March, 2018, moreover it is a debt free company

Issues

i) Salary of Rs 4.6 Crores to Sharda Relan (Age: 82) – Mother of MD
Rs 4.6 Crores makes up roughly 5% of the company’s profit. Moreover, one has to wonder if this adds any value to to the revenue or profits.
ii) Infighting in the family effecting revenues
Rohit Relan is the brother of Ajay Relan and is also the CMD of Bharat Seats Ltd. Due to disputes in the family, he was not re-appointed to the board of Sharda Motors Ltd. As a result, Bharat Seats has lowered the orders to Sharda Motors. The issue has gone up to the NCLT.
Bharat Seats Ltd. contributes a significant part of the revenues of Sharda Motors. A reduction in orders will impact both the revenue and profits of the company.

Valuations

  • PE Ratio: 10.68
  • M.Cap to Sales: 0.78
  • Market Capitalization: Rs 906 Crores
The stock trades at a PE Ratio of 10.68. Sharda Motors Stock price has fallen more than 50% from it’s peak of Rs 3,099. The company is available for Rs 906 Crores while it has current investments worth Rs 104 Crores. That means, the business is available for ~ Rs 800 Crores.
However, in any company, between business profits translating to shareholder profits stands the Management. We see red flags in the salary that the MD’s Mother withdraws and the family dispute might hit the revenues of the firm. Despite being cash rich, the company takes loans from the promoter family and pays ~ 8% to 10% interest on the same. Though the firm clocked double digit growth in FY18, the Q2FY19 figures show a degrowth of 1.9% in the revenues.

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