20.0% India Auto Components Sector - Credit Suisse

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04 November 2014

Asia Pacific/India

Equity Research

Auto Parts & Equipment (Automobiles & Components IN (Asia)/Media IN (Asia))

India Auto Components Sector THEME

On the fast track

Figure 1: Auto components industry has grown faster than OEMs in the past

ten years and better maintained profitability and return ratios

-10.0%

0.0%

10.0%

20.0%

Revenue growth Change in Gross margins Change in EBITDA margins Change in ROEs

Auto OEMs Auto Parts

Trend in last 10 years

Source: Company data, Credit Suisse estimates, CMIE Prowess

■ Auto components industry may grow faster than OEMs. In the past ten

years, the top 100 auto component companies' revenue growth has

outpaced that of original equipment manufacturers (OEM) by >500 bp. We

expect this trend to accelerate on: (1) OEMs' efforts to consolidate vendors;

(2) higher localisation; (3) faster export growth; (4) rising content per vehicle;

and (5) faster replacement market growth.

■ Mapping the small-cap auto component companies. As all the large

Indian auto component companies have a very high exposure to global

markets, and thus are not plays on an Indian recovery, we met

managements of 15 small-cap Indian auto component companies over the

past month. Within our coverage of the auto component sector, we prefer

companies having: (1) exposure to passenger and commercial vehicles; (2)

products with technological edge; (3) dominant share in key products; (4)

diversified customer base; (5) opportunity to expand into new products; (6)

improving product mix; and (7) low margin volatility.

■ Prefer CV component plays; initiating coverage on Wabco; raise TP on

Apollo, and Bharat Forge. We have a positive view on the CV cycle;

however, Ashok Leyland (an OEM play) is now pricing in best-case earnings;

we downgrade it to NEUTRAL. We prefer a basket of CV component stocks.

We initiate coverage on Wabco with an OUTPERFORM rating and a TP of

Rs4,820 (34.5% potential upside), and upgrade our TPs on Apollo Tyres and

Bharat Forge. Wabco has an ~80% market share in the CV braking industry in

India and is a good structural play on CVs, with safety and emission content

per truck in India being a tenth that of European markets. A CV cycle recovery

and mandatory ABS implementation are near-term stock triggers, in our view.

Research Analysts

Jatin Chawla

91 22 6777 3719

[email protected]

Akshay Saxena

91 22 6777 3825

[email protected]

04 November 2014

India Auto Components Sector 2

Focus charts and tables Figure 2: Auto components industry has outpaced auto OEMs by ~500 bp in the past ten years and the trend should continue

Source: Company data, Credit Suisse estimates

Figure 3: Comparison of the 15 small-cap companies (whose managements we met) on various parameters

Parameter Comments Companies scoring well

Segment exposure Faster growth for companies with greater exposure to high-growth

categories (India PV and India CV) Jamna, Wabco, Sona Koyo, Rane, Asahi

Nature of product offerings Companies with complicated product offerings have fewer

chances to be displaced by Tier 1 suppliers, etc Wabco, Sona Koyo

Market-share positioning Barriers to entry from low-cost structures, expertise in design and

quality, technology-intensive products, strong brands, etc. Wabco, Asahi, Jamna

Customer dependence Low dependence on single customers resulting in lower

vulnerability to market-share movements of OEM Suprajit, Minda Corp

New opportunities for

growth

Outperform industry due to entry in new products/segments/

customers or due to change in industry trends Fiem, Sundaram Clayton

Margin lever from low

utilisation

Companies operating at low utilisation will benefit more from

growth uptick

Minda Ind, M&M CIE, Rane, Jamna, Gabriel,

Fiem

Other margin levers Increase in profitability due to other factors such as movement

towards better mix, and raw material benefits Fiem, CEAT, JK Tyres

Return ratio, asset turns Companies with consistently high ratios and high turnovers on low

capex/working capital Suprajit, Wabco, Jamna

Margin volatility Companies with high pricing power have low margin volatility

across cycles and stable models Suprajit, Fiem, Sundram Fasteners, Wabco

Source: Company data, Credit Suisse

Figure 4: Wabco has outperformed the local T&B

production in each market by a healthy margin

Figure 5: Sharp revival in content per vehicle with

recovery in CV cycle, ABS implementation, new products

-20%

-10%

0%

10%

20%

30%

Europe NorthAmerica

SouthAmerica

Japan/Korea China India

CY10 CY11 CY12 CY13

WABCO's outperformance in each market

0%

6%

12%

18%

24%

30%

-

9,000

18,000

27,000

36,000

45,000

FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

WABCO Content per vehicle (Rs) YoY growth

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

04 November 2014


On the fast track Geared for growth In the past ten years, the top-line CAGR of auto components industry has outpaced that of

auto OEMs by >500 bp, and we expect this gap to widen further on: (1) a consolidation of

the industry as OEMs increasingly move towards a single/lesser supplier model—share of

top ten players is up >500 bp in the past five years; (2) the rising share of exports as

foreign-based OEMs look to source greater components from India—exports have

increased from US$3.5 bn in FY07 to US$10 bn in FY14; (3) sizeable growth opportunity

in the replacement segment (margins are 300-400 bp higher than the OEM segment) as

consumers up-trade from the unorganised segment; GST implementation can reduce the

pricing gap (~40%) between organised and unorganised, and CCI clampdown on OEMs

regarding spares' availability could expand the market; (4) Indian arms of foreign OEMs

increasing localisation in the wake of rising costs in a competitive environment (gap of

almost ~15% between Maruti and other MNCs); and (5) increasing content per vehicle,

driven by regulation and consumer aspirations.

Our analysis of the consolidated industry financials indicates that the components sector

is well placed to tap into this future growth; utilisation rates remain low (~70%),

indicating margin expansion from operating leverage as the cycle recovers. Despite

slowing top-line growth, components companies managed to improve gross margins,

driven by export profitability and some raw material benefit (which could increase further

if commodity prices remain benign). PAT margins are though only steady because of

negative operating leverage.

Conversations with small-cap companies We met managements of 15 small-cap Indian auto component companies (US$100-500

mn market cap) over the past month (short write-ups on each company are provided later).

Our discussions with them indicate that while demand is improving with suppliers across

segments, they are still not outright bullish.

We believe the auto component sector can be assessed on the following parameters:

On growth parameters, we like companies having: (1) larger exposure to the India OEM

space (particularly PVs and CVs), (2) product offerings with a technological edge, (3)

dominant market share positioning in key segments with entry barriers, (4) a diversified

customer base with low exposure to a single customer, and (5) the potential to outperform

market growth from untapped opportunities such as new product, and new segment.

Based on margin lever parameters, we like companies that can improve margins in the near

term on: (1) operating leverage benefit from an uptick in utilisation, as growth returns and (2)

other margin levers such as movement towards better mix, and benign raw materials. On

financial parameters we like companies that have: (1) high return ratios and higher asset turns,

and (2) low margin volatility across cycles, denoting stable model and high pricing power.

A basket of component stocks to play the CV cycle We remain very constructive on the CV cycle but our preferred play on this theme, Ashok

Leyland, is now already pricing in the best-case scenario; hence, we are downgrading it to

NEUTRAL. We think investors should instead switch to a basket of component names that

are supplying to the CV industry. We are increasing our target price for Apollo Tyres

(OUTPERFORM) to Rs266 and for Bharat Forge (NEUTRAL) to Rs830. Apollo Tyres

remains our preferred pick in the components space, and we initiate on Wabco as well.

We initiate coverage on Wabco with an OUTPERFORM rating and a TP of Rs4,820:

Wabco is the largest player in the CV braking industry in India with a >80% market share.

We believe Wabco is one of the best structural plays in the Indian auto components space,

with safety and emission content per vehicle in India being a tenth of European markets.

Wabco India also has a prominent position in Wabco's global scheme of things as its hub

for adapting products for emerging markets as well as being a critical country in its plans

to increase sourcing from low-cost countries. CV cycle recovery and mandatory ABS

implementation are near-term triggers for the stock, in our view.

Auto components industry

has grown 500 bp higher

than OEMs…

…structural factors which

will increase the gap

Components industry well

placed for an upcycle

Downgrade Ashok Leyland

to NEUTRAL

Prefer Wabco, Apollo Tyres

to play the CV cycle

04 November 2014


Valuation comparison and revenue breakdown Figure 6: Indian auto-parts small cap companies trailing valuations

Name Ticker Price (Rs) Market cap

(US$ mn)

3M price

performance

1Y price

performance

P/E

(trailing) (x)

EV/EBITDA

(trailing) (x)

Asahi India Glass AISG IN 125 506 43% 175% 16.5

Ceat Ltd. CEAT IN 870 521 75% 366% 11.6 6.3

Fiem Industries FIEM IN 701 140 16% 242% 22.5 10.8

Gabriel India GABR IN 83 200 60% 306% 28.1 13.9

Jamna Auto JMNA IN 133 88 17% 146% 38.0 12.1

JK Tyres JKI IN 498 341 67% 301% 8.0 5.7

Mahindra CIE MACA IN 219 340 43% 354%

Minda Corp MDA IN 555 178 47% 131% 42.1 14.7

Minda Industries MNDA IN 544 144 83% 224% 141.4 13.7

Rane Holdings RHL IN 571 136 46% 258% 17.5 5.9

Sona Koyo Steering SONA IN 61 203 55% 371% 14.3 8.6

Sundaram Clayton SDC IN 1,641 553 23% 462% 17.5 6.3

Sundram Fasteners SF IN 159 556 47% 271% 27.6 13.9

Suprajit Engineering SEL IN 122 244 9% 245% 28.8 16.4

Prices as of close of 3-Nov-14. Source: Company data, CMIE, the BLOOMBERG PROFESSIONAL™ service

Figure 7: Indian large-cap auto-parts companies—consensus valuations

Company CMP Market cap P/E EV/EBITDA ROE P/B

(Rs) (US$ bn) FY16E FY17E FY16 FY176 FY16 FY16

Bosch Limited 15,502 7.9 35.1 29.3 23.4 20.9 17.9 6.0

Motherson Sumi Systems 426 6.1 20.9 16.2 8.6 6.7 39.0 7.3

Bharat Forge Limited 812 3.1 22.5 18.2 12.0 10.2 23.7 4.9

Exide Industries 160 2.2 18.4 15.5 11.3 9.6 16.6 3.0

Apollo Tyres 230 1.9 10.1 9.0 6.2 5.7 18.8 1.7

Amara Raja 644 1.8 21.2 17.7 12.9 10.0 26.2 5.2

Wabco India Ltd. 3,584 1.1 29.4 21.4 19.1 15.3 23.1 6.3

Note: All estimates are consensus. Prices as of close of 3-Nov-14. Source: Company data, I/B/E/S Datastream

Figure 8: Revenue breakdown for each company

Company Revenue breakdown by segment Revenues outside India Share of

Name PV 2W CV Non-auto, others exports + international plants replacement

Asahi 49% 51% 5% 0%

CEAT 9% 17% 60% 14% 20% 58%

Fiem 5% 85% 10% 5% 10%

Gabriel 30% 60% 10% 3% 11%

Jamna 100% 2% 14%

JK Tyres 15% 80% 5% 30% 63%

M&M CIE 48% 42% 10% 85% 0%

Minda Corp 35% 45% 20% 33% 12%

Minda Ind 25% 65% 5% 5% 20% 15%

Rane 60% 3% 25% 12% 17% 13%

Sona Koyo 95% 5% 10% 0%

Sund. Clay 30% 20% 50% 45% 0%

Sund. Fast 40% 8% 45% 7% 40% 2%

Suprajit 19% 60% 15% 6% 14% 10%

Wabco 100% 30% 15%

Source: Company data

04 November 2014


Table of contents Geared for growth 6

Auto-parts to continue growing faster than OEMs 6 Auto OEMs entering an upcycle… 10 …parts companies well positioned to capitalise 11

Conversations with small-cap companies 14 Growth outlook improving but a full-blown recovery still some time away 14 Framework to assess auto-component plays 15 (1) Segment exposure 15 (2) Nature of product offering 16 (3) Market-share positioning 17 (4) Customer dependence 18 (5) Potential to outperform from new opportunities 19 (6) Operating leverage lever from utilisation pick-up 19 (7) Other margin levers such as mix, raw materials 20 (8) Higher return ratios and higher asset turns 20 (9) Lower margin volatility 22

A basket of component stocks to play CV cycle 23 CV cycle is recovering… 23 ..but OEM Valuations already reflect that 25 Prefer basket of CV focused auto-component plays 26

Companies 27 Wabco India Ltd. (WABC.BO / WIL IN) 28

Structural play in a cyclical industry 28 Wabco India Ltd. WABC.BO / WIL IN 29 About the company 30 High entry barriers and strong growth prospects is a unique combination 31 Strong structural story in content per vehicle 32 Initiate with an OUTPERFORM and a TP of Rs4,820 36 Investment risks 37

Apollo Tyres (APLO.BO / APTY IN) 38 Raw material tailwinds to continue 38

Bharat Forge Limited (BFRG.BO / BHFC IN) 39 Strong growth but elevated multiples 39

Ashok Leyland Ltd (ASOK.BO / AL IN) 40 Strong recovery already priced in 40

Company visit notes 41 Suprajit Engineering (Not Rated) 42 JK Tyres (Not Rated) 44 Jamna Auto (Not Rated) 46 Fiem Industries (Not Rated) 48 Gabriel India Ltd. (Not Rated) 50 Sona Koyo Steering Systems (Not Rated) 52 Minda Corporation Ltd. (Not Rated) 54 CEAT Ltd. (Not Rated) 56 Minda Industries Ltd. (Not Rated) 58 Sundram Fasteners (Not Rated) 60 Rane Holdings Ltd. (Not Rated) 62 Sundaram Clayton (Not Rated) 64 Asahi India Glass (Not Rated) 66 Mahindra CIE (Not Rated) 67

04 November 2014


Geared for growth In the past ten years, top-line CAGR of auto components industry outpaced that of auto

OEMs by >500 bp, and we expect this gap to widen further on: (1) a consolidation of the

industry as OEMs increasingly move towards a single/lesser supplier model—the share of

the top ten players is up >500 bp in the past five years; (2) the rising share of exports as

foreign-based OEMs look to source greater components from India—exports have

increased from US$3.5 bn in FY07 to US$10 bn in FY14; (3) sizeable growth opportunity

in the replacement segment (margins are 300-400 bp higher than the OEM segment) as

consumers up-trade from the unorganised segment; GST implementation could reduce

pricing gap (~40%) between organised and unorganised players and CCI clampdown on

OEMs regarding spares' availability can expand the market; (4) Indian arms of foreign

OEMs increasing localisation in the wake of rising costs in a competitive environment (gap

of almost ~15% between Maruti and other MNCs); and (5) the increasing content per

vehicle, driven by regulation and consumer aspirations.

Our analysis of the consolidated industry financials indicates that the components sector is well

placed to tap into this future growth; utilisation rates remain low (~70%), indicating margin

expansion from operating leverage as the cycle recovers. Despite slowing top-line growth,

components companies manage to improve gross margins, driven by export profitability and

some raw material benefits (which could increase further if commodity prices remain benign).

PAT margins are though only steady because of negative operating leverage.

Auto-parts to continue growing faster than OEMs

Over the past ten years, the top 100 auto-components companies have witnessed a

CAGR of 17% compared with a ~12% CAGR for the auto OEM industry, thus

outperforming the industry by ~500 bp. While doing so these companies have managed to

maintain their profitability, with EBITDA margins remaining stable at 13% and PAT

margins at 5%. In our view, the outperformance of the auto parts industry could increase

further in the next few years on account of the following factors

#1 Industry consolidation

The Indian auto components industry is highly fragmented, consisting of ~500 players in

the organised sector and many more in the unorganised sector. The top 50 companies

contribute 85% to the total revenue. Industry consolidation is a global phenomenon and

the trend is now catching up in India as well. As per a McKinsey report of March 2012, The

share of revenues of top 150 suppliers globally has climbed up from 34% to 45% over the

last decade. In India, the share of the top 10 companies (excluding tyres) has increased by

more than 500 bp in the past five years.

Figure 9: The automotive industry in India is highly

fragmented with over 500 players in the organised sector

Figure 10: Just like globally, India's auto parts industry

consolidating with the share of top players rising

0 50 100 150 200 250 300

Revenue>USD 100 Mn

Between USD 50 Mn and 100Mn

Between USD 25Mn and 50Mn

Between USD 5Mn and 25Mn

Less than USD 5 Mn

Number of auto parts companies split by revenues

44.0%

46.0%

48.0%

50.0%

52.0%

FY10 FY11 FY12 FY13 FY14

Share of revenues of 10 largest companies (excluding Tyre)

Source: Company data, ACMA Note: Aggregate of ~100 auto parts companies. Source: CMIE

04 November 2014


The key reasons for this are:

■ OEMs reducing their supplier base to cut costs: A number of OEMs have

announced plans to cut suppliers. M&M recently announced that it is reducing the total

number of its suppliers from 650 to 450, and reducing its supplier base by 10% each

year. This would enable it to cut the costs of purchasing from component makers, as

the single supplier would now have bigger scale. This also enables the OEM to deal

with just one supplier rather than multiple players for a single component. Similarly,

Tata Motors too has also indicated its intention of bringing down its suppliers from

1,400 to 400. For example, Jamna Auto, which is Tata Motors' supplier of leaf springs,

has been asked to increase its share of business from 55% to 65%.

■ Move towards platform consolidation: One reason that necessitated the need for

larger numbers of suppliers was the wide number of designs required for each

component given the large number of models of each OEM. As each manufacturer had

multiple models, it traditionally required different suppliers to cater to the components for

each of these. So, despite having consolidated players on the auto OEM side, there were

far too many models and with each model having a different design and thus insufficient

economies of scale. But now with car manufacturers moving towards a modular design

and platform consolidation (a number of models sharing the same platform), economies

of scale should become more relevant. Globally, there is a trend towards commonality:

common platforms, common parts. This should also help larger auto component

companies and also result in share swinging from the unorganised to organised.

#2 Exports of auto components to pick up

Indian companies have a huge cost advantage over their Western peers on labour costs with

wage costs in India being a tenth of those in Europe and the US. The primary reason for this

is the large availability of highly skilled labour in India, which combined with improving quality

standards, makes Indian auto components an attractive proposition for foreign OEMs. The

rupee's sharp depreciation has made India even more cost competitive.

Figure 11: Wage costs in India significantly lower than the west

0

5

10

15

20

25

30

35

40

45

Germany France Australia Canada US Italy Japan UK Spain Argentina Brazil Mexico India China

Hourly wage (USD) on PPP terms

Source: Bureau of labour statistics, Credit Suisse estimates

The slowdown in growth in developed markets has also put great cost pressures on OEMs

in developed markets and they are thus looking at increasing their sourcing from lower

cost countries like India. India's auto component exports have grown at a ~20% CAGR in

the past decade with the share of exports in revenues of Indian auto component

companies increasing from ~15% to ~30%. Indian companies have also made strategic

acquisitions (especially in Europe given easier labour laws) to aid exports.

04 November 2014


Over time, Indian auto component industry has matured and moved on from supplying

primarily to the aftermarkets, to catering to global OEMs directly (the share of OEMs has

increased from just ~35% in 1990 to 80% in 2010). The shift towards OEMs shows the

improving perceived quality of Indian players.

Given that only 30% of revenues of the auto component industry in India come from

exports compared to 70% in Thailand highlights the further potential here.

Figure 12: Share of exports in auto component turnover is

increasing

Figure 13: Better quality of exports by the industry as

more is exported to OEMs

0%

5%

10%

15%

20%

25%

30%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Auto-components exports (USD Bn)

Share of auto components exports as % of industry turnover (RHS)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1990 2010

Exports made to OEM's Exports for Aftermarket

Source: Company data, ACMA Source: Company data, ACMA

#3 Faster growth in the replacement segment

Typically, the share of revenues from the replacement segment is low for most of the

organised auto component companies. For most of the companies, the share of

replacement is <15% of revenues (excluding tyres and batteries). For some components,

given the nature of products, the replacement opportunity is in any case low (e.g., steering

systems, etc.). For others, such as shock absorbers, brake linings, and leaf springs, even

though there is a big market for replacement, it is currently being catered to by the

unorganised segment. Typically, in the replacement segment, products from the

unorganised segment are priced at a 40-50% discount. While a part of the lower pricing

comes from lower quality, a large part of it is from the fact that the unorganised industry

does not pay taxes. Hence, once GST comes in, the share of organised players should

increase. Also, as customers become brand conscious and products become more

technically complicated, the share of unorganised segment should reduce.

In many cases, OEMs also put restrictions on suppliers and forbid them from making

spare parts freely available in the market (instead selling them only to OEMs which then

sell via their dealerships). With the recent CCI clampdown on OEMs regarding such

contracts with suppliers, suppliers may again be soon allowed to directly sell in their own

open market.

With margins in the replacement segment being 300-400 bp higher than for the OEM

segment, growth in the replacement segment will also be good for profitability.

04 November 2014


Figure 14: Other than tyre and battery companies, the replacement share is low for most

companies in the auto component space

0%

20%

40%

60%

80%JK

Tyr

es

Cea

t

Wab

co

Min

da In

d

Jam

na

Ran

e

Min

da C

orp

Gab

riel

Sup

rajit

Fie

m

Sun

d. F

ast

Share of revenues from replacement


#4 Greater localisation by India-based OEMs

OEMs are also opting for increased localisation to realise better cost savings. This means

that the content (value) per vehicle added by domestic ancillary companies is greatly

increasing. Maruti Suzuki is working with its vendors to raise overall indigenisation levels

to 90% from ~75%. All the other global players with Indian operations (the likes of Toyota,

Honda, Hyundai, etc.) have even greater import content, and are also pursuing increased

localisation. This would help their competitiveness by reducing costs and also help negate

the impact of a fluctuating currency.

This would result in increased opportunities for the Indian component sector. Many of

these efforts are alliance/JV driven with foreign suppliers. Foreign OEMs when they set up

shop in India tell their local suppliers from their home country to come along since they

have their trust and also the technology. Hence, there is a trend towards JVs/partnerships

for Indian component guys with foreign players as then they also get preference from

OEMs. There have been a number of tie-ups announced in recent years between Indian

and foreign suppliers for products such as safety components, auto electronics, embedded

systems, simulation technology, etc.

04 November 2014


Figure 15: Most OEMs still have large import content and attempt to bring it down to cut

costs and mitigate against FX fluctuations

50%

60%

70%

80%

90%

100%

Level of Localisation


#5 Increasing content per vehicle

The last growth driver is expected to be increasing content per vehicle. This would be

primarily driven by two factors: (1) More stringent norms for safety and emissions; and (2)

More features being demanded by the customer especially electronically controlled

functions. OEMs have been significantly forced to increase the electronic content in cars in

last few years in response to customer needs and this is expected to rise in future.

To meet the emission norms by improving efficiency without compensating power, has led

to stringent design specifications of components which requires high-precision and high-

technology manufacturing processes. This is leading to significant increases in the content

of vehicles. Similarly, with India recording a large number of accidents, the safety of both

occupants as well as pedestrians is gaining importance. Several regulations are being

drafted for enhanced safety in passenger cars which will again increase content per

vehicle. Companies, such as Wabco, have officially outlined how content increases per

vehicle during the different stages of the evolution of an industry in a country. We do note

that globally also with increases in content, vehicle prices haven't changed much because

of the competitive nature of industry—with both OEMs and suppliers also continually

having to cut costs and innovate.

Auto OEMs entering an upcycle…

Auto industry poised to benefit from cycle uptick in domestic market

While the auto industry grew at healthy ~15% p.a. levels over FY06-11, the downturn

since then has impacted growth. The PV industry saw three consecutive years of

declines/subdued growth for the first time, the medium and heavy commercial vehicles

industry (M&HCV) saw two straight years of big 25% declines, while growth fell even in the

2W sector which has had a relatively structural growth story in the country.

The election results, which led to the formation of a single-party majority government at

the centre after a long time, clearly changed sentiment on the ground, with auto volumes

turning a corner. There is much pent-up demand for autos and an economic recovery

could really bring that to the forefront. Given low penetration levels in most vehicle

segments with income levels that should continue to grow over the next few years, there is

still much headroom for growth to sustain in the medium term. With India taxing imports

heavily, OEMs have been forced to set up domestic capacities to cater to demand; hence,

the entire eco-space should benefit, as recovery picks up more.

04 November 2014


Figure 16: The PV industry has had three consecutive

slow years for the first time

Figure 17: The M&HCV industry has had two straight

years of big ~25% declines

-10%

0%

10%

20%

30%

40%

FY93 FY95 FY97 FY99 FY01 FY03 FY05 FY07 FY09 FY11 FY13 YTDFY15

Domestic PV's growth

-40%

-20%

0%

20%

40%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

LCV's growth M&HCV growth

Source: SIAM, Credit Suisse estimates Source: SIAM

India as a hub for small cars

Globally, there is pressure on OEMs to migrate their manufacturing facilities to low-cost

countries and India fits the bill. India has already emerged as a car manufacturing hub for

global auto majors, particularly small vehicles. Hyundai, Nissan-Renault, Ford etc. have all

set up production facilities in India for global distribution. A significant part of Hyundai’s

and Nissan’s vehicles produced in India is now exported. From about 5% a decade ago,

nearly ~20% of total passenger vehicles produced in India are now exported. Other than

cars, India is also an export hub for other vehicle segments like two wheelers, three-

wheelers and tractors, implying ample growth opportunities for the sector.

Figure 18: From around 5% a decade, nearly ~20% of total

passenger vehicles produced in India is now exported

Figure 19: Significant part of Hyundai, Nissan and Ford's

production in India is exported

0%

5%

10%

15%

20%

25%

PV production from India exported

PV production from India exported

0%

10%

20%

30%

40%

50%

60%

70%

80%

Ford Hyundai Maruti Nisssan Toyota Volkswagen

Production exported

Source: SIAM Source: SIAM

…parts companies well positioned to capitalise

Expanded capacity in previous cycle and sitting on low utilisations

Most of the players had embarked on significant capacity expansion programmes in the

years prior to the downcycle (FY09-12 period) in order to capitalise on both higher

04 November 2014


domestic and export opportunities. Moreover, there was greater hunger for inorganic

growth, as Indian companies made acquisitions abroad to procure technology or brand.

This resulted in a sharp increase in industry capex. With the downcycle setting in, asset

turnover for the industry had a significant contraction. Moreover, given that OEMs

themselves were in difficulty, they began to squeeze suppliers further which resulted in

large increase in working capital for suppliers due to increase in receivable days.

Figure 20: Asset turnover had contracted in the downturn Figure 21: Working capital cycle too had worsened with

OEMs further squeezing suppliers

1.0

1.1

1.2

1.3

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Asset turnover

35

45

55

65

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Working Capital days Receivable Days

Note: Aggregate of ~100 auto parts companies. Source: CMIE Note: Aggregate of ~100 auto parts companies. Source: CMIE

Despite top-line growth slowing down, gross margins have improved…

As expected, the top-line growth of the sector fell in the past two years, coinciding with the

industry's slowdown. However, the interesting aspect is that gross margins expanded

~400 bp in the past two years. We believe this is on account of: (1) better export

profitability due to the rupee's depreciation which benefits the likes of Bharat Forge, etc.,

(2) RM benefiting from benign commodities, especially for products like tyres where there

is a large replacement segment and hence companies can retain benefit, and (3)

companies making extra efforts on cost reduction to counter the slowdown

Figure 22: Top-line growth subdued for past two years … Figure 23: … but companies witnessing gross margin

expansion on better export profitability and RM benefit

0%

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Sales growth

30.0%

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04 November 2014


…but PAT margins remained flat because of negative operating leverage

However, the negative operating leverage impact from lower sales growth (on account of

higher fixed costs as a percentage of sales) meant that gains at the EBITDA and PAT

margin levels were much smaller. EBITDA margins had a small increase while the higher

depreciation and interest expenses (as a percentage of sales) meant that PAT margins

were steady only.

Figure 24: Lower gains in EBITDA and PAT margins

because of negative operating leverage

Figure 25: Return ratios came down in the downturn

0.0%

4.0%

8.0%

12.0%

16.0%

EBITDA margins PAT margins

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FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

ROE ROCE (ex tax)


04 November 2014


Conversations with small-cap companies We met managements of 15 small-cap Indian auto component companies (US$100-500

mn market cap) over the past month (short write-ups on each company are provided later).

Our discussions indicate that demand is improving with suppliers across segments seeing

improving growth outlook but they are still not outright bullish.

We believe the auto component sector can be assessed on the following parameters:

On growth parameters, we like companies having: (1) larger exposure to the India OEM

space (particularly PV and CV), (2) product offerings with a technological edge, (3)

dominant market share positioning in key segments with entry barriers, (4) a diversified

customer base with low exposure to a single customer, and (5) potential to outperform

market growth from untapped opportunities such as new product, and new segment.

On margin lever parameters, we like the companies which can improve margins in the

near term on: (1) operating leverage benefit from an uptick in utilisation as growth returns

and (2) other margin levers such as movement towards a better mix, and benign raw

material prices. On financial parameters, we like companies which have: (1) high return

ratios and higher asset turns, and (2) low margin volatility across cycles, denoting stable

model and high pricing power.

Growth outlook improving but a full-blown recovery

still some time away

The Indian OEM industry has had a tough time of late with consecutive years of decline/

subdued industry growth across segments. In the past few months, especially after

elections results there have been signs of growth returning, though the festival season has

again been lukewarm. Our discussions with suppliers across segments indicate that they

are seeing positive growth momentum. They expect the gradual trend in growth

acceleration to sustain as they are clearly seeing uptick in schedules from OEMs.

The two-wheeler (2W) industry had recovered the first (and was anyways not much

impacted in the slowdown). Suppliers expect 10-15% growth in the near term for the 2W

industry and 10% in the long term. On the passenger vehicles side, they are expecting the

industry to grow at ~10% for the year and at ~15% in the long term given the large

headroom for growth. The CV segment should also continue on its positive growth

momentum with the extremely favourable base, though there has been little on the ground

improvement.

Figure 26: Suppliers across segments looking at growth uptick in the Indian OEM space

Company Comments on FY15/ short-term OEM industry growth

CEAT Ltd. Growth pick-up observed in all OEM segments, replacement has not yet recovered but should follow suit.

Fiem Industries Both 2W and 4W industry to grow at 10-12% in medium term

Gabriel India 2W segment to continue to do well, momentum coming back in PVs and CVs should recover soon.

Jamna Auto 8% CV industry growth in FY15.

JK Tyres Small growth in CV OEM in FY15 followed by 25% n FY16, 12% growth in FY15 in PV OEM, replacement to also

recover to ~10% from low single digit.

Mahindra CIE In near term: India PV market to grow at 10%, European PV in mid-single digits and small decline in Europe CVs.

Minda Corp In near term: 2W to grow at 15-20%, PVs at 10-15% and CVs too should start growing now.

Rane Holdings PV industry to grow at 10% in FY15, CV industry to return to positive growth soon.

Sona Koyo Steering PV industry recovery has surprised them and it may grow in double digits now.

Sundaram Clayton Positive growth momentum for India OEMs, slight downward trend in European CVs.

Sundram Fasteners Signs of recovery in the CV industry.

Suprajit Engineering Both 2W and 4W industries to grow at >10% hereon


04 November 2014


Framework to assess auto-component plays

The Indian auto components sector is highly fragmented with nearly ~500 companies in

the organised sector. Barring select companies such as Bosch, Motherson Sumi, Bharat

Forge, all the other companies have market capitalisation that is less than US$500 mn.

Consequently, most of these companies have limited coverage and are not on investors'

radar. We provide a framework on possible ways to evaluate companies in our coverage

of the auto component sector, and also profiles of the 15 companies we had visited on

each of these factors based on the historical data. We believe auto component companies

should be assessed on the following growth parameters, margin levers parameters and

return ratios parameters.

Growth parameters: The factors which we consider here determine the top-line growth

opportunities of a company: these are potential of segments where a company is present,

core competitive advantages that will ensure a sustainable market share, possibility to

exploit untapped opportunities. We use the following five parameters to measure this:

1. Larger exposure to the Indian OEM space, particularly PV and CV.

2. Complicated product offering with technological edge.

3. Dominant market-share positioning in key segments with entry barriers.

4. Diversified customer base with low exposure to a single customer.

5. Poised to outperform the market either by entering into new segments/new

geographies or by introducing new products.

Margin lever parameters: The parameters which we consider here determine the trend in

profitability for the company and which have levers to expand margins in the near term:

6. Operating leverage benefit from pickup in capacity utilisation.

7. Other levers such as shift towards better mix, benign raw material prices etc.

Financial parameters: The parameters determine the free cash flow generation ability,

stability of business model and resilience in down-cycles and free cash. We use the

following parameters to measure this

8. Higher return ratios and asset turns.

9. Low margin volatility across cycles denoting stable model and high pricing power.

Below we explain why each of these parameters is important and also provide profiling of

the companies we had visited.

(1) Segment exposure The first factor which we look into is the segment exposure of the company. The Indian

auto industry has lot of structural drivers which will come to the fore as income levels rise

and customers' purchasing power increase. Vehicle penetration in the country still

significantly lags that of other countries—both developed and even emerging markets

such as Brazil, China, and South-East Asia. Hence, we expect companies which have

greater exposure to India's OEM sector to enjoy faster market growth.

Within the Indian OEM space, we expect PVs and CVs to grow faster over the longer run.

The gap in 2W penetration in the country (with respect to other countries) is smaller than

that for cars. Hence, India may reach the maturity stage in 2Ws by as early as 2020,

whereas on the cars front there is still a long way to go. Moreover, PV and CV growth was

impacted much more in the downturn as compared with the 2Ws; so even near-term

growth should be higher in PVs and CVs. Hence, we prefer companies which have greater

exposure to Indian PV and CV segments.

04 November 2014


Of the companies that we visited, Mahindra CIE and Sundaram Clayton have large

exposure to outside India. Fiem, Minda Industries, Gabriel and Suprajit are largely Indian

2W plays. Companies with very large exposure to the Indian PV segment are Sona Koyo,

Rane, and Asahi (which though has large exposure to non-autos too). Jamna, WABCO,

and tyre companies (largely replacement) have large exposure to the Indian CV space.

Figure 27: Revenue breakdown share for each company

Company Revenue breakdown by segment Revenues outside India Share of

Name PV 2W CV Non-Auto, others Exports + International plants Replacement

Asahi 49% 51% 5% 0%

Ceat 9% 17% 60% 14% 20% 58%

Fiem 5% 85% 10% 5% 10%

Gabriel 30% 60% 10% 3% 11%

Jamna 100% 2% 14%

JK Tyres 15% 80% 5% 30% 63%

M&M CIE 48% 42% 10% 85% 0%

Minda Corp 35% 45% 20% 33% 12%

Minda Ind 25% 65% 5% 5% 20% 15%

Rane 60% 3% 25% 12% 17% 13%

Sona Koyo 95% 5% 10% 0%

Sund. Clay 30% 20% 50% 45% 0%

Sund. Fast 40% 8% 45% 7% 40% 2%

Suprajit 19% 60% 15% 6% 14% 10%

Wabco 100% 30% 15%


(2) Nature of product offering

The second factor which we look into is the nature of each company's product offerings

and how complicated it is to design/manufacture them. Typically Tier 1 players supply

complete modules to OEMs while Tier 2 players supply sub-components to Tier 1 players.

If a Tier 2 player is manufacturing a simple part, there remains a risk that the Tier 1 player

may backward integrate and start manufacturing even the sub-component itself. On the

other hand, for a complicated part given the designing and manufacturing expertise

required, it is unlikely that Tier 1 supplier or OEM will completely do everything/shift to

another supplier. Of the various systems in a vehicle, we divide:

■ engine, transmission, steering, and electric automation parts as highly complicated;

■ suspension and braking parts, body and chassis, and safety parts as moderately

complicated; and

■ equipment such as headlights and tyres, along with interior fittings such as seat trims

as less complicated products.

04 November 2014


Figure 28: Nature of product offerings of each company

Company Name Product Exposure Complication

Asahi India Glass Industrial glass (100%)—automotive glass (windshields, etc), architectural float glass. Medium

Ceat Ltd. Tyres (100%) Low

Fiem Industries Lighting (70%), rear-view mirrors (13%), plastic moulded (10%), LED luminaries (8%) Low

Gabriel India Ride-control products—shock absorbers, front forks (100%) Medium

Jamna Auto Leaf spring (100%) Medium

JK Tyres Tyres (100%) Low

Mahindra CIE Forgings (70%), castings (10%), rest is gears and stampings High

Minda Corp Automotive security (40%), driver information (35%), plastic interiors (25%) Low

Minda Industries Switches (45%), lighting (18%), horns (22%), others (14%) Low

Rane Holdings Manual steering (24%), hydraulic steering (18%), power steering (20%), friction

materials (15%), engine valve (14%), others (9%) High

Sona Koyo Steering Steering systems (90%), drive-lines (10%) High

Sundaram Clayton Aluminum die-casting products (100%) Medium

Sundram Fasteners Fasteners (40%), pump (30%), powder metal (15%), cold extrusion (15%) Low

Suprajit Engineering Cables (90%), rest is speedometer and other components Medium

Wabco Braking systems (100%) High


(3) Market-share positioning

Given the fragmented nature of India's auto parts industry, it becomes critical to have

strong barriers to entry in the business in order to maintain/gain share. The various factors

on which firms can generate barriers to entry can be summarised as follows:

Figure 29: Key barriers to entry/success factors for Indian auto component players

Factor Reason

Expertise in design and consistent quality

Ability to design, test and produce as per customised requirements of OEMs for each model,

while maintaining quality. OEMs want suppliers who can provide complete solutions, right from

design, testing to manufacturing

Cost structure

OEMs have greater bargaining power given the large number of auto-component players, hence,

cost becomes important factor. Efficient cost structure arises due to factors such as economies of

scale, cost leadership due to higher R&D spend, and hence ability to do everything in-house, etc.

Technology intensive (tie-ups with foreign

suppliers) or capital intensive

For many high-tech products, OEMs prefer partnerships with foreign suppliers with whom they

have likely worked before. In capital-intensive products, threat of new entrants is lesser

Customised products with long gestation

period

Elaborate testing and development procedure for some components such as crankshafts in which

suppliers have to work with OEMs during the development stage of vehicle, so long relationships

for lifetime unless new models/platforms are launched.

Plants spread across country in proximity to

OEMs

Not only lowers freight costs, OEMs have bigger comfort around inventory management with

movement towards 'just in time'.

Brand (replacement focussed) More relevant to the replacement market as customers are only willing to pay premium over the

unorganised sector (which is typically ~40%) for brand strength.

Distribution network (replacement focused) Essential to have a nation-wide distribution network to increase share in replacement.


Most of the companies that we surveyed are amongst the top three players in their

segment. Asahi (glass), Jamna (leaf-springs), Sona Koyo (steering), Suprajit (cables),

Sundaram Fasteners (fasteners) and Wabco (braking systems) are market leaders.

Companies such as Fiem, Gabirel, JK Tyres, Minda Ind, Rane are amongst top-two

players in their segment.

04 November 2014


Figure 30: Market-share positioning of each company in different segments

Company Market-share in key segments

Asahi India Glass 70% market share in PV OEMs, 25% market share in architectural float glass

Ceat Ltd. 24% market share in 2Ws, 13% in truck bias, 10% share in passenger car radial, and 8% share in truck radial

Fiem Industries 35% market-share in 2W lamps and mirrors

Gabriel India 25% market-share in 2Ws, 30% market-share in PVs and 70% market-share in CVs

Jamna Auto 65% share in CV OEM

JK Tyres 34% share in TBR, 20% share in truck bias, 13% share in cars radial

Mahindra CIE 40% share in crankshafts in India PVs, 25% share in Europe PVs and 10-15% share in Europe CVs

Minda Corp Top-three or top-four player in most categories

Minda Industries 60% share in 2W switches, 47% share in 2W horns

Rane Holdings 55% share in hydraulic steering, 37% share in brake linings

Sona Koyo Steering 50% market-share in PVs

Sundram Fasteners 40% market-share in fasteners in domestic autos

Suprajit Engineering 50% share in 2Ws, 25% share in 4Ws,15% share in replacement

Wabco India 85% share in CVs


Figure 31: Wabco, Asahi and Jamna have >50% market-share in their products

0%

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60%

80%

100%

Wabco Asahi Jamna Sona Koyo MindaIndustries

SundramFasteners

Suprajit Fiem Gabriel JK Tyres Ceat

Market-share of auto components players in the key segments they operate


(4) Customer dependence

Another factor impacting growth of a supplier is diversification of its client base. If a

company has large exposure to a particular OEM client, it gets exposed to (1) OEM losing

market share (then the supplier too will underperform the industry), and (2) big negative

impact on revenues if that OEM wishes to shift its business to some other supplier. Hence,

we prefer companies which have low revenue contribution from top clients.

However, there is an exception to this—if dominant share of that client's business is

served by the supplier then it would be difficult for them to shift out. As an example, Fiem

has more than 75% of lights and rear-view mirrors business of Honda and TVS; hence,

they are unlikely to change supplier easily. Moreover, given the nature of the Indian OEM

industry (especially CVs), players such as Jamna have high share of revenue from top two

clients because the OEM industry structure itself is consolidated.

04 November 2014


Figure 32: Fiem, Jamna and Sona Koyo have>50% exposure to top two clients

Company name Top Clients Contribution of

top two clients

Share of OEMs business

Asahi India Glass Maruti is biggest customer Large share of most OEMs

Fiem Industries Honda 2Ws (45%), TVS (28%), Suzuki (4%) 73% >75% business of Honda, TVS, Suzuki.

Gabriel India No single customer more than 20% - Honda 2W,

TVS and Bajaj biggest 35%

Biggest supplier to Honda, TVS and second

biggest to Bajaj

Jamna Auto Tata Motors (50%), Ashok Leyland (20%) 70% 65% share of Tata and near 100% share of other

players such as AL, Daimler

Minda Corp Bajaj, M&M and VW together (35%) 25%

Minda Industries Bajaj (27%), TVS (16%), Honda (9%) 33%

Rane Holdings Maruti (20%), M&M (10%), Tata (10%) 30%

Sona Koyo Steering Maruti (45%), M&M (15%) 60% >80% of business of Maruti, M&M, Toyota,

Nissan

Sundaram Clayton TVS is biggest customer

Suprajit Engineering Hero (18%), Bajaj (15%), TVS (14%) 33%

Wabco India Tata Motors is biggest customers Big share in all CV players


(5) Potential to outperform from new opportunities

The above four factors relate to the category growth potential of the company and its

ability to maintain/gain market share. However, there may be other untapped growth

opportunities for the company outside its core business which may allow it to materially

outperform the industry. We divide this into following five factors:

Figure 33: Growth opportunities for company outside the core business

Factor Implications Examples of companies benefitting

New products Big incremental growth opportunities from new/existing

product

Fiem (LED), Rane (Airbags – safety regulations), Sona Koyo

(EPAM - exports), WABCO (ABS mandatory)

New segments Big incremental sales from entry into new or a currently

small vehicle segment

Jamna (Exports, LCV); Sundaram Clayton (HCVs in India),

Rane (LCV, Exports), Suprajit (non-autos, exports), Asahi

Glass (CVs, tractors)

New customers Opportunity to gain new customers in existing business Mahindra CIE

Higher replacement with

shift from unorganised

Replacement sector is largely unorganised because of

cost advantage, but shift as customers become brand

conscious

Gabriel, Jamna, Sundaram Fasteners, Suprajit

Change in industry trends Opportunity to gain share within existing customers Jamna (vendor consolidation), JK Tyres (radialisation),

Sundaram Clayton (shift from iron casting to aluminium)


(6) Operating leverage lever from utilisation pick-up

Going to the margin lever parameters, the first thing which we look here is the trend in

profitability. Given the downturn the sector has been witnessing for the past few years and

with the economy poised to recover, the most obvious margin lever is operating leverage

benefit from pick-up in utilisation. Many of the auto-component players had gone for big

capacity expansions in the bull-cycle years of 2010-12, anticipating strong growth in the

OEM industry to continue. Consequently their utilisations fell, as capacities came on

stream but industry growth stagnated. These should now reap operating leverage benefit

in recovery as fixed costs (as a percentage of sales) come down. Most of the company

managements whom we had met talked of 100-150 bp margin improvement from ~10%

higher utilisation. Nearly half of the 15 companies that we interacted with are currently

operating at <65% utilisation. Capex requirements of these companies would also remain

comparatively low.

On the other hand there are some companies that haven't gone for big capacity expansion

for some time (like CEAT) or have been seeing good growth even in the slowdown on

account of market-share gains (such as Suprajit). These companies have already been

operating at high utilisations and would need to go for capacity expansions soon.

04 November 2014


Figure 34: Suprajit and Sundaram Fasteners already operating at high utilisations; ~50%

of total companies operating at <65% utilisation so should have op leverage benefit

40%

60%

80%

100%

Capacity Utilization


(7) Other margin levers such as mix, raw materials

There are other factors which can lead to improvement in the profitability of an auto

component player which we summarise as follows:

Figure 35: Other possible margin levers for different companies

Factor Implications Companies claiming to benefit

Favourable movement in

mix Shift towards greater margin products or segments

Feim – 600 bp higher margins on LEDs, Ceat – 2W have

higher margins than CVs, JK Tyres – 300 bp higher

margins on radial

RM benefit

Commodities have remained benign with rubber (down ~15%

in 2 months) and crude (down ~20% in 2 months) particularly

soft. More relevant for companies which have higher share of

replacement since OEM's have pass-through clause for

gain/fall in commodity prices

Ceat, JK Tyres (Both rubber and crude each constitute

over ~40% of raw material for the tyre companies)

More sales to

Replacement

Replacement margins typically higher by 200-300 bp over

OEM margins so shift in replacement market from

unorganized to organized will aid mix

Suprajit (~50% share in OEM vs ~15% in replacement),

Jamna, Rane

Increase in localisation

OEMs allowing suppliers to retain 50% of benefit of bringing

down import content – more relevant for high technology

electronic products

Sona Koyo (Import content already bought down from

30% to 18% will take it to 15%), Rane, Minda Corp

Cost cutting efforts Streamlining costs, increasing efficiency, moving out of

unprofitable businesses Gabriel, Mahindra CIE, Minda Ind, Minda Corp

Working Capital Control Doesn't impact margins but positively impacts cash flow Sundaram Clayton, Sundaram Fasteners


(8) Higher return ratios and higher asset turns

Moving on to the financial parameters the first thing which we look at is the return ratios of

the companies. Companies with high profitability on account of factors such as dominant

market share (like Jamna, Wabco) typically have higher return ratios. 2W sector

companies too have higher returns on an average given the lower capex requirements.

04 November 2014


Figure 36: Suprajit, WABCO and Jamna have the highest

ROEs

Figure 37: 2W sector-focused companies along with

WABCO also have highest ROCEs

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Source: Company data, CMIE Prowess Source: Company data, CMIE Prowess

Companies with higher returns and higher asset turnover usually have greater cash-flow

generation. Some businesses such as casting, forging and glass manufacturing are highly

capital intensive; so such companies have low asset turnovers. Though we note

companies like Bharat Forge still have high return ratios on account of high profitability on

being present in complicated products spaces like heavy forgings in non-autos.

On the other hand, single product companies with low-to-medium product complexity,

such as cables and shock absorbers, typically have lower capex and hence better asset

turnover. Auto component players also typically have positive working capital cycles (due

to OEMs taking credit) and this drag downs asset turnover as well. Capex-to-sales ratios

for some of the companies, such as Minda Corp, are high on account of group

restructuring, along with a spate of international acquisitions that they have made.

Figure 38: Companies with low asset turnover typically

are more capital intensive e.g. Asahi, Sundaram Clayton

Figure 39: Capex to sales high for the Minda group of

companies

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04 November 2014


(9) Lower margin volatility

Suppliers, such as Wabco, which have high bargaining power due to reasons such as

technology leadership have better pricing power and resilient margins across cycles. The

other suppliers with stable margins are 2W sector-focused companies, such as Suprajit

and Fiem, as the 2W OEM sector in India has seen relatively secular growth with very few

down-cycle years. On the other hand, tyre companies have very volatile margins

depending on the commodity cycle and consequently trade at lower multiples. The current

margins of tyre companies are already much higher than the historical average, given the

continued raw material benefits they have enjoyed from falling rubber prices.

Figure 40: 2W sector-focused companies and Wabco have

low margin volatility while for tyre companies it is high

Figure 41: Current margins of tyre companies are above

the historical average

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04 November 2014


A basket of component stocks to play CV cycle We remain very constructive on the CV cycle but our preferred play on the same Ashok

Leyland is now already pricing in the best case scenario hence we are downgrading it to a

NEUTRAL. We think investors should instead switch to a basket of component stocks

supplying to the CV industry. We are also increasing our TP on Apollo Tyres (O) to Rs260

and on Bharat Forge (N) to Rs830. Our preferred pick in the component space remains

Apollo Tyres and we are now initiating coverage on WABCO as well.

Initiate on WABCO (OUTPEFROM) with a TP of Rs4,820: WABCO is the largest player in

the CV braking industry in India with a >80% market share. We believe WABCO is one of

the best structural plays in the Indian auto component space with safety and emission

content per vehicle in India being a tenth of European markets. WABCO India also has a

prominent position in WABCO's global scheme of things as its hub for adapting products

for emerging markets as well as being a critical country in its plans to increase sourcing

from low cost countries. CV cycle recovery and mandatory ABS implementation are near-

term triggers for the stock.

CV cycle is recovering…

The CV industry in India has seen a big slowdown with the M&HCV industry declining

~25% in each of the last two years (FY13 and FY14). While things have bottomed out in

1H FY15 with CV volumes staying flat YoY, we expect the recovery to pick up pace in 2H

FY15 with 15% growth. We expect this growth to pick up further in FY16 when we are

expecting 30% growth in M&HCV volumes. From peak annual sales of ~350,000 units,

industry volumes had fallen to less than 200,000 units; hence, the recovery when it

happens should be equally sharp. We expect volumes to reach their previous peak in

absolute volumes by FY17.

Exhibit 42: M&HCV industry had big declines for two

straight years…expect recovery ahead

Exhibit 43: Our CV industry growth tracker shows clear

signs of pick-up

-40%

-30%

-20%

-10%

0%

10%

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30%

40%

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50,000

100,000

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350,000

400,000

M&HCV sales YoY growth (RHS)

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2010

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2013

2014

12 m Moving Average M&HCV's growth

Source: SIAM, Credit Suisse estimates Source: SIAM, Credit Suisse estimates

In our recent report, India Commercial Vehicle: A strong verdict—CV recovery in sight, we

had highlighted improved prospects of higher CV sales. With the strongest election verdict

in thirty years, a stable central government is likely to not only help revive sentiment and

thereby consumption but also kick-start the investment cycle.

https://doc.research-and-analytics.csfb.com/docView?language=ENG&format=PDF&document_id=1033173411&source_id=csplusresearch&serialid=MDkf00EIXMorbG%2FdY0BqkzjeJB%2FesdCnHrFAgo7JLhA%3D#toolbar=1&view=FitH

04 November 2014


The CV sector which has a very high correlation with the health of the economy should be

a clear beneficiary. The M&HCV market is highly cyclical but on an average grows 1.5x

GDP growth. The truck population represents the freight-carrying capacity in the economy,

and growth in this capacity is a function of GDP. While there are numerous factors that

affect the length and the shape of the CV cycle, the primary driver is economic growth.

With GDP growth falling sub ~5% in the last two years, CV industry growth was deeply

impacted. Now with the new govt. and a possible return to ~7% GDP growth in a couple of

years, outlook for CVs will start improving.

Exhibit 44: CV industry is strongly correlated to economic health of the country

2.0%

4.0%

6.0%

8.0%

10.0%

-40%

-20%

0%

20%

40%


CV growth GDP (RHS)

Source: Company data, CMIE

In the June-14 quarter, India’s GDP had picked up 100 bp QoQ (although it was aided by

one-off factors). Our economists expect revival in India’s GDP to continue over next two

years and this should directly benefit CV growth.

Exhibit 45: India’s GDP growth saw pick-up in the June

quarter (although it was aided by one-offs)

Exhibit 46: Our economists expect GDP revival for next

two years

4.0%

4.5%

5.0%

5.5%

6.0%

India quarterly GDP

3.0

5.0

7.0

9.0

FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E

India Real GDP Growth (YoY%)

Source: Company data, CMIE Source: Company data, Credit Suisse estimates

04 November 2014


Signs of improvement already visible on the ground

Even before the positive election results, there were signs of improvement—most notably

the hike in freight rates in the past few months. For the last two years (2012 and 2013)

given the poor demand and low utilisation, freight operators had limited ability to hike

freight rates even though operating costs such as diesel prices and driver salaries were

increasing sharply. However, since the start of this calendar year, they have been able to

take up freight rates by ~10%. This is the first positive sign in any demand recovery.

Freight operators were also delaying replacing old vehicles given the weak outlook. Our

channel checks suggest that of late there has been increase in scrappage of very old

trucks (unviable due to increase in operational costs), thereby improving freight operators’

utilisation. Replacement demand should thus now come to the fore.

Exhibit 47: After a gap of two years, freight rates have gone up ~10% this year

40,000

60,000

80,000

100,000

Delhi-Mumbai Delhi-Kolkatta Delhi-Hyderabad Delhi-Chennai Delhi-Bangalore

FY12 FY13 FY14 FY15YTD

Freight rates (Rs) for round trip 16

ton load

Source: IFTRT

..but OEM Valuations already reflect that

Given their market-share dominance in Indian CV space, Indian OEM's will be direct

beneficiaries of CV cycle recovery. Other than the robust volume growth, they should also

see strong margin expansion from higher capacity utilization and lower discounts. We

have been positive on Ashok Leyland (which is the only OEM which is CV play) for some

time but are now downgrading the stock to NEUTRAL. Valuations are high for the stock

with AL now trading at ~20x one year forward EV/EBITDA (consensus) compared to

historic average of ~8x. While earnings are depressed at the moment, stock has seldom

traded above ~12x EV/EBITDA in the past.

Our FY17 earnings estimates for the stock are ~35% higher than consensus as we are

building a sharp rebound in volumes with15%/30%/12% growth in FY15/FY16/FY17 along

with return to peak margins of previous cycle. Even on our higher than street estimates,

stock is trading at ~8x 24 month forward EV/EBITDA (which in fact is its average one year

forward multiple). Hence the current stock price leaves little room for upside.

Implementation of GST can be another risk as a.) it frees up freight capacity as movement

of goods between states eases up impacting CV industry growth and b.) Results in market

share movement in favour of MNC players (Bhart Benz, Eicher Volvo etc) as their product

portfolio is more suited for the same.

04 November 2014


Figure 48: Ashok Leyland trading well above historic

valuations and even the peak valuations

Figure 49: Stock valuations rich even on two year forward

basis, assuming full blown recovery

0

5

10

15

20

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Ashok Leyland EV to 12M fwd EBITDA

0

5

10

15

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Ashok Leyland EV to 24M fwd EBITDA

Source: Company data, I/B/E/S Datastream Source: Company data,I/B/E/S Datastream

Prefer basket of CV focused auto-component plays

To play the CV cycle rather than Ashok Leyland we prefer a basket of CV focused auto

component stocks. Within our coverage, there are 3 auto component stocks which are

largely focused on the commercial vehicle segment:-

Apollo Tyres (Increase TP to Rs 266): Apollo Tyres is our top pick in the auto

component space. Other than being a direct play on CV cycle, company has huge margin

tailwinds on benign raw material. Whilst rubber has been on a declining trend since FY12

and has resulted in a 600 bp margin expansion from the bottom, rubber prices have

corrected a further 25% YTD. Given that rubber accounts for 40% of the input costs for the

company, on our analysis a 1% change in rubber impacts EPS by 1.8%. In the last couple

of months, crude prices too have fallen ~15%. The sensitivity with crude is even higher

since almost all the remaining input costs are crude-linked resulting in a sensitivity of 1%

change in crude impacting EPS by >2%.

WABCO (Initiating coverage with OUTPERFORM and TP of Rs 4820): Wabco is the

largest player in the CV braking industry in India with a >80% market share. Given that

~45% of its revenue comes from domestic CV OEMs, Wabco is a strong play on the

potential CV cycle recovery. Compulsory ABS implementation from October 2015 should

add ~US$200 to content per vehicle. ABS will likely add ~15% to revenue/EBITDA in

FY17E. Wabco India also has a unique position in Wabco global's scheme of things as it is

the hub for adapting products to emerging markets, and exports that have witnessed a

>60% CAGR in the past five years are likely to see a >15% CAGR in the next three years.

Bharat Forge (Increase TP to Rs 830, Retain NEUTRAL on high valuations): Bharat

Forge is a play on global capex recovery with company deriving ~50% of revenues from

CVs spread across Europe, India, USA. The company is structurally moving towards

higher-margin and return businesses continues. The company has been able to increase

the share of non-autos to 41% currently and plans to increase it to 50% in the next few

years. With tough emission norms globally resulting in engine downsizing, the share of

forging in passenger cars and more specifically aluminium forgings should increase. BF is

focusing on increasing its PC share to 20% in the next few years. It has also consistently

been able to increase machining content which aids margins. However we retain

NEUTRAL on the stock given the high valuations (trading at one year forward earnings of

~25x compared to historic average of ~18x).

04 November 2014


Companies

04 November 2014


Asia Pacific / India

Wabco India Ltd.

(WABC.BO / WIL IN) INITIATION

Structural play in a cyclical industry

■ Initiate with OUTPERFORM for ~35% potential upside. We initiate

coverage on Wabco India (Wabco), our preferred play on a favourable CV

cycle in India, with an OUTPERFORM rating and a Rs4,820 target price.

Wabco is the largest player in the CV braking industry in India with a >80%

market share. Along with Knorr Brense, it is the largest player in the global

CV braking industry as well.

■ Rising content per vehicle and exports should drive top line. Wabco's

content per vehicle in India is a tenth of the content per vehicle in Europe.

While it will take regulatory changes and some structural changes for the

content per vehicle to reach levels seen in developed markets, content per

vehicle has been steadily growing, and we see increasing acceptance of

Wabco's new products. Wabco India also has a unique position in Wabco

global's scheme of things as it is the hub for adapting products to emerging

markets, and exports that have witnessed a >60% CAGR in the past five

years are likely to see a >15% CAGR in the next three years.

■ CV cycle recovery and ABS implementation are near-term triggers.

Given that ~45% of its revenue comes from domestic CV OEMs, Wabco is a

strong play on the potential CV cycle recovery. In a recovery, multi-axle

vehicles tend to outperform other segments, thus boosting content per

vehicle for Wabco. Compulsory ABS implementation from October 2015 will

add ~US$200 to content per vehicle. ABS will likely add ~15% to

revenue/EBITDA in FY17E. Automated Manual Transmission is another

product which is witnessing strong traction in buses.

■ Valuation. We expect Wabco to deliver a strong ~40% CAGR in EPS in the

next three years. Our DCF-based target price of Rs4,820 implies ~35%

potential upside. Based on our TP, the stock would be valued at 28x FY17E

EPS, which is in line with the current multiple of Bosch India Ltd. Key risks

to our call are (1) increase in competition from Knorr Brense, (2) delay in the

implementation of ABS, and (3) increase in royalty by the parent company. Share price performance

80

130

180

0

1000

2000

3000

4000

Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the S&P

BSE SENSEX IDX which closed at 27860.38 on 03/11/14

On 03/11/14 the spot exchange rate was Rs61.41/US$1

Performance over 1M 3M 12M Absolute (%) -7.5 8.7 115.9 — Relative (%) -12.3 1.2 84.9 —

Financial and valuation metrics

Year 3/14A 3/15E 3/16E 3/17E Revenue (Rs mn) 11,107.0 13,206.2 18,072.7 24,266.4 EBITDA (Rs mn) 1,661.5 2,059.2 3,223.1 4,647.0 EBIT (Rs mn) 1,340.0 1,705.6 2,834.1 4,219.0 Net profit (Rs mn) 1,174.8 1,298.9 2,109.9 3,104.5 EPS (CS adj.) (Rs) 61.94 68.48 111.24 163.68 Change from previous EPS (%) n.a. Consensus EPS (Rs) n.a. 72 122 167 EPS growth (%) -10.2 10.6 62.4 47.1 P/E (x) 57.9 52.3 32.2 21.9 Dividend yield (%) 0.14 0.17 0.17 0.17 EV/EBITDA (x) 39.7 31.9 20.2 13.8 P/B (x) 9.0 7.8 6.4 5.0 ROE (%) 16.7 16.0 21.7 25.5 Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates

Rating OUTPERFORM* Price (03 Nov 14, Rs) 3,584.10 Target price (Rs) 4,820.00¹ Upside/downside (%) 34.5 Mkt cap (Rs mn) 67,982 (US$ 1,107) Enterprise value (Rs mn) 65,644 Number of shares (mn) 18.97 Free float (%) 25.0 52-week price range 3,905.8 - 1,640.0 ADTO - 6M (US$ mn) 0.46

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Jatin Chawla

91 22 6777 3719

[email protected]

Akshay Saxena

91 22 6777 3825

[email protected]

04 November 2014


Wabco India Ltd. WABC.BO / WIL IN Price (03 Nov 14): Rs3,584.10, Rating: OUTPERFORM, Target Price: Rs4,820.00, Analyst: Jatin Chawla

Target price scenario

Scenario TP %Up/Dwn Assumptions

Upside 6,000.0

0 67.41

Faster recovery in CV space and more new products launched by Wabco

Central case 4,820.0

0 34.48

Downside 3,000.0

0 (16.30) CV recovery delays

Key earnings drivers 3/14A 3/15E 3/16E 3/17E

Revenue growth (%) 15.0 18.9 36.8 34.3 Margins (%) 15.0 15.6 17.8 19.1

Income statement (Rs mn) 3/14A 3/15E 3/16E 3/17E

Sales revenue 11,107 13,206 18,073 24,266 Cost of goods sold 6,339 7,660 10,301 13,832 SG&A 3,107 3,487 4,548 5,788 Other operating exp./(inc.) — — — — EBITDA 1,662 2,059 3,223 4,647 Depreciation & amortisation 321.5 353.7 389.0 427.9 EBIT 1,340 1,706 2,834 4,219 Net interest expense/(inc.) 1.4 — — — Non-operating inc./(exp.) 272.1 150.0 180.0 216.0 Associates/JV — — — — Recurring PBT 1,611 1,856 3,014 4,435 Exceptionals/extraordinaries — — — — Taxes 436 557 904 1,331 Profit after tax 1,175 1,299 2,110 3,105 Other after tax income — — — — Minority interests — — — — Preferred dividends — — — — Reported net profit 1,175 1,299 2,110 3,105 Analyst adjustments — — — — Net profit (Credit Suisse) 1,175 1,299 2,110 3,105

Cash flow (Rs mn) 3/14A 3/15E 3/16E 3/17E

EBIT 1,340 1,706 2,834 4,219 Net interest 270.7 150.0 180.0 216.0 Tax paid (392) (557) (904) (1,331) Working capital (259) (467) (984) (1,244) Other cash & non-cash items 321.5 353.7 389.0 427.9 Operating cash flow 1,282 1,186 1,515 2,289 Capex (603) (750) (1,000) (1,000) Free cash flow to the firm 678 436 515 1,289 Disposals of fixed assets — — — — Acquisitions — — — — Divestments — — — — Associate investments — — — — Other investment/(outflows) — — — — Investing cash flow (603) (750) (1,000) (1,000) Equity raised — — — — Dividends paid (111.0) (132.6) (132.6) (132.6) Net borrowings — — — — Other financing cash flow — — — — Financing cash flow (111.0) (132.6) (132.6) (132.6) Total cash flow 567 303 382 1,156 Adjustments — — — — Net change in cash 567 303 382 1,156

Balance sheet (Rs mn) 3/14A 3/15E 3/16E 3/17E

Cash & cash equivalents 2,034 2,337 2,719 3,875 Current receivables 2,315 2,752 3,766 5,057 Inventories 1,124 1,337 1,830 2,457 Other current assets 807 960 1,152 1,383 Current assets 6,280 7,387 9,468 12,772 Property, plant & equip. 3,065 3,461 4,072 4,644 Investments 22.0 22.0 22.0 22.0 Intangibles — — — — Other non-current assets 111.0 111.0 111.0 111.0 Total assets 9,478 10,981 13,673 17,549 Accounts payable 1,470 1,748 2,392 3,212 Short-term debt — — — — Current provisions 294.2 353.0 423.6 508.3 Other current liabilities — — — — Current liabilities 1,764 2,101 2,816 3,720 Long-term debt 0.40 — — — Non-current provisions — — — — Other non-current liab. 161.4 161.4 161.4 161.4 Total liabilities 1,926 2,262 2,977 3,881 Shareholders' equity 7,552 8,718 10,695 13,667 Minority interests — — — — Total liabilities & equity 9,478 10,980 13,672 17,549

. 3/14A 3/15E 3/16E 3/17E

Shares (wtd avg.) (mn) 19.0 19.0 19.0 19.0 EPS (Credit Suisse) (Rs) 62 68 111 164 DPS (Rs) 5.00 6.00 6.00 6.00 BVPS (Rs) 398 458 564 721 Operating CFPS (Rs) 68 65 82 124

Key ratios and valuation 3/14A 3/15E 3/16E 3/17E

Growth(%) Sales revenue 15.0 15.5 36.5 33.9 EBIT (22.2) 24.6 71.2 48.1 Net profit (10.2) 8.4 67.0 46.5 EPS (10.2) 8.4 67.0 46.5 Margins (%) EBITDA 15.0 15.8 18.5 19.9 EBIT 12.1 13.0 16.3 18.1 Pre-tax profit 14.5 14.2 17.4 19.0 Net profit 10.6 9.9 12.1 13.3 Valuation metrics (x) P/E 59.0 54.4 32.6 22.2 P/B 9.2 8.0 6.5 5.1 Dividend yield (%) 0.14 0.16 0.16 0.16 P/CF 54.1 56.4 44.3 29.5 EV/sales 6.05 5.21 3.79 2.78 EV/EBITDA 40.5 33.1 20.5 14.0 EV/EBIT 50.2 40.1 23.2 15.4 ROE analysis (%) ROE 16.7 15.7 22.0 25.6 ROIC 18.1 19.8 28.2 33.8 Asset turnover (x) 1.17 1.18 1.29 1.34 Interest burden (x) 1.20 1.09 1.06 1.05 Tax burden (x) 0.73 0.70 0.70 0.70 Financial leverage (x) 1.26 1.25 1.27 1.28 Credit ratios Net debt/equity (%) (26.9) (27.4) (26.3) (29.4) Net debt/EBITDA (x) (1.22) (1.18) (0.87) (0.86) Interest cover (x) 927 — — —

Per share data 3/14A 3/15E 3/16E 3/17E

Shares (wtd avg.) (mn) 19.0 19.0 19.0 19.0 EPS (Credit Suisse) (Rs) 62 68 111 164 DPS (Rs) 5.00 6.00 6.00 6.00 BVPS (Rs) 398 460 564 721 Operating CFPS (Rs) 68 63 80 121


0

5

10

15

20

25

30

35

40

45

2010 2011 2012 2012 2013

12MF P/E multiple

0

1

2

3

4

5

6

7

8

2010 2011 2012 2012 2013

12MF P/B multiple

Source: IBES

04 November 2014


About the company

Wabco is a leading global supplier of technologies and control systems for the safety and

efficiency of commercial vehicles. Westinghouse Air Brake Company (Wabco) was

founded in 1869 in Pittsburgh, Pennsylvania. Wabco was acquired in 1968 by American

Standard and later in 2007 spun off as a separate listed company. Wabco had 11,000

employees (1,650 engineers) in 34 countries and sales of US$2.7 bn in 2013.

Figure 50: Key products of the WABCO group globally


Wabco has a strong track record of innovation and technology leadership. It has given

many firsts to the CV industry—Anti-Lock braking Systems (ABS), Electronically

Controlled Air Suspension (ECAS), Automated Manual Transmission (AMT), Electronic

Braking Systems (EBS), Electronic Stability Control (ESC), Collision Mitigation System

(CMS), Advanced emergency Braking Systems (AEBS), Roll Stability Support (RSS) etc.

Wabco-TVS India Ltd was started as a JV between the TVS group and Wabco in 1962.

Thereafter, once Wabco was spun-off into a separate company, it made endeavours to

increase its stake, and in 2009 Wabco bought out TVS's 37.5% stake into the company

and now Wabco owns 75% (the maximum allowed in a listed company) in the company.

Wabco was allowed to use the TVS trademark in the market until 2012. Currently, all its

operations are run under the Wabco India brand name and Wabco-TVS India Limited was

renamed to Wabco India Limited in 2011.

Wabco India currently employs over 3,200 employees and has five manufacturing plants

in the country. Wabco India is the hub for Wabco global for adapting products for

emerging markets and is also emerging as an important sourcing destination in the

group's strategy of increasing sourcing from best cost countries. The Mahindra City plant

is dedicated to exports.

04 November 2014


High entry barriers and strong growth prospects is a

unique combination

CV braking industry: A highly concentrated one

The global CV braking industry is fairly concentrated with three leading players Wabco,

Knorr Branse, and Haldex. Within the three, Knorr Branse and Wabco are clearly the top

two players with Haldex as the key challenger in most markets. Wabco is dominant in

most emerging markets. In India, Wabco's dominance is even higher with a 85% share

with Knorr having the remaining share. Knorr opened a new plant in Pune in November

2013, one of six plants opened in 2013; as it becomes more aggressive in closing the gap

with Wabco in emerging markets. Apart from commercial vehicles, Knorr is also a very

strong player in braking systems for railways.

CS global preference for safety and emissions

Given the high content of electronics in safety and emission control systems, the threat

from unorganised or smaller players is lower for the industry. In the PV industry, given the

huge volumes that a single model/platform can sell, one can get scale even by being a

supplier to a single product. But for CVs, one needs so have a really wide product range

and several variants for the same product; hence, the upfront investment needed for high

technology products is a lot higher and thus the CV braking industry globally has very few

suppliers.

Figure 51: The CV braking industry is globally a consolidated industry with three main players

Source: WABCO Investor presentation

04 November 2014


Strong structural story in content per vehicle

The content per vehicle for Wabco's product suite in Indian trucks is among the lowest in

the world. Europe is the highest as it has (1) the most stringent regulations for both vehicle

safety and emissions, and (2) one of the highest fleet age. A lot of Wabco products while

increasing the upfront costs of the vehicle, help reduce the maintenance cost. Thus if a

truck is used for a long period of time, it makes sense for the fleet operator to opt for

Wabco products. For example, while a large part of the fleet in the US is still using drum

brakes, Western Europe has almost entirely moved to disc brakes; this one product can

add more than US$300 to content per vehicle.

As a market, fleet age is very high in India too, but the trucks right now are just too basic

as fleet operators don’t see the value from sophisticated trucks, given poor driving

conditions, poor asset utilisation (trucks spend a lot of time on state borders), and poor

logistics management at corporates (trucks spend a lot of time waiting for loading and

unloading). On the emission side, India follows European regulations with a lag; while the

lag on cars is one generation, on trucks the gap is of three generations; so while Europe

has just moved from Euro V to Euro VI norms, in India most of the trucks are still running

on BS III norms (similar to Euro III norms).

Figure 52: India has among the lowest content per vehicle

globally; catch-up should happen in the next few years

Figure 53: Regions with higher fleet age have a higher

content per vehicle

Regional

Average heavy

truck price (US$)

Content per

vehicle (US$)

Content as a %

of vehicle price

Western Europe 130k >3000 2.3%

South America 65k <1500 2.3%

Japan & Korea 80k <1000 1.3%

North America 80k <1000 1.3%

Eastern Europe 70k <500 0.7%

China 30k ~300 1.0%

India 30k ~300 1.0%

0

500

1000

1500

2000

2500

3000

3500

0

2

4

6

8

10

12

Western Europe Brazil USA

Average Fleet Size in years Content per vehicle in USD (RHS)


How Wabco has globally outperformed in every market

As can be seen in the figure below, Wabco has outperformed the industry production

growth in each of its market by a reasonable margin in almost each of the years. It is

interesting to note that Wabco continues to grow its content per vehicle even in developed

markets such as Europe and North America. The sharp growth in content per vehicle in

the North American market is on account of adoption of AMT and OnGuard in a big way.

The big exception in Japan/Korea in CY12 is on account of a sharp surge in exports from

these markets, which have significantly lower content than trucks sold in the local market.

04 November 2014


Figure 54: Wabco has outperformed the local T&B production in each market by a

healthy margin; level of outperformance higher in the US and emerging markets

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Europe North America South America Japan/Korea China India

CY10 CY11 CY12 CY13

WABCO's outperformance in each market


During CV recovery, multi-axle vehicles tend to grow even faster

For the Indian market, the decline in content per vehicle in the past few years has happened

on account of a sharper decline in HCV sales in the past two years compared to the overall

market. Within HCV also the decline has been far higher in segments with higher content per

vehicle such as multi-axle vehicles and tippers (impacted by mining bans).

Figure 55: Share of MAVs is higher during a recovery helping content per vehicle

0%

20%

40%

60%

80%

100%

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

7.5-12T 12T-16T MAV >16T Haulage Buses > 7.5T

Source: Company data, SIAM

04 November 2014


Figure 56: As the market evolves, Wabco's content per vehicle will increase

Product Indicative

pricing in USD

Function

Foundation brakes—drum 250 Low-end brakes used in a truck

Foundation brakes—disc 450 High-end brakes used in a truck

Automatic slack adjuster 70 Reduce brake maintenance costs and costs associated with

vehicle safety inspection.

ABS 250 Anti-lock braking system prevents skidding of vehicles.

EBS 450 Improves braking comfort, increases vehicle safety, reduces

maintenance costs.

Actuators 200 An actuator is a type of motor that is responsible for moving

or controlling a mechanism or system.

Lift axle control system 300 Monitors the load and automatically lifts the axle, thereby

reducing rolling resistance and hence helping save fuel

costs.

Electronically controlled air

suspension

560 Helps improve ride quality and eases loading and unloading

and reduce maintenance costs.

Automated manual

transmission

500 Reduces driving stress and improves mileage.

Integrated vehicle tire

monitoring system

400 Helps reduce maintenance costs and reduce downtime.

Electronic door control

system for buses

900 Improves safety.

Source: Credit Suisse estimates

Even in India, Wabco's focus on launching new products has increased in the past few

years with the company launching a number of new products in the market. In the near

term, management feels the lift axle, automatic slack adjuster and AMT should do well.

AMT has been very well accepted, especially on buses where a lot of city driving is

involved.

Figure 57: Wabco's AR suggest the new products which could soon be launched into

India to increase the content per vehicle

Areas of focus in R&D in FY13 and FY14

Key product launched -

- Higher-capacity compressors

- Lift axle control valve

- Automatic Slack Adjuster

- New actuators and brake chambers

High speed track for ABS homologation

Future plan of action

Launch of actuators for emerging markets

Expanding market for automatic slack adjusters

Launch of Air Processing & Distribution assembly in India

Launch of lift axle control system in domestic market

New concept developments such as hybrid lift axle control system, foot brake valve, relay valves and actuators

Source: WABCO India Annual Report

ABS: Near-term trigger

ABS is currently mandatory only for a few segments of vehicles which account for less

than 10% of total M&HCV sales. However, given that the number of road accidents in

India are much higher than most other countries and the fact that over a third of them

happen because of trucks and buses (which have a much lower share of vehicle

population), it is not surprising that the government has decided to make ABS mandatory

for all M&HCVs from 01 October 2015.

04 November 2014


Figure 58: Earlier ABS was mandated only for hazardous vehicles, trailers, some buses

Source: Ministry of Road Transport and Highways

Figure 59: Now been made mandatory for buses>7.5T and trucks >12T

Source: Ministry of Road Transport and Highways

Figure 60: India has amongst the highest rate of road

fatalities per vehicle…

Figure 61: … and trucks and buses have the highest

share in fatalities despite much lower penetration

0

50

100

150

200

250

India China World Thailand SouthKorea

US Japan Germany UK

Road fatalities per 100k vehicles

Two-wheelers22%

Auto-rickshaws4%

Cars & taxis18%

Trucks & Buses36%

Other motor vehicles

12%

Other vehicles/objects

8%

Fatal accidents in India by vehicle type


While the proposed rules cover only new vehicles, we believe the probability of freight

operators seeing the benefits of ABS in terms of reduced accidents and opting for a

retrofitment on their existing vehicles as well goes up significantly with this rule. As of now

we don’t build in anything from that in our numbers though.

04 November 2014


Figure 62: ABS will account for ~15% of revenues in FY17

FY16 FY17

M&HCV sales 299,937 359,925

ABS pricing (Rs) 12000 12000

Net revenues (Rs mn) 1,799.62 4,319

Share of total revenues (%) 10% 18%

EBITDA margins (%) 17% 17%

EBITDA 306 734

Share of total EBITDA (%) 9% 16%


Content per cost to increase at a 20% CAGR in the next three years

We expect Wabco's content per vehicle in the domestic market to increase from

~Rs24,000 to ~Rs42,000 in the next three years. This should be driven by the factors

highlighted below.

i) A CV cycle recovery where multi-axle vehicles show even faster growth

ii) ABS implementation adding Rs12,000 per vehicle; Rs6,000 to content cost in

both FY16 and FY17

iii) New products such as automatic slack adjuster, AMT and life axle control

systems

Figure 63: We expect a sharp revival in content per vehicle with the recovery in the CV

cycle, ABS implementation and new products

0%

5%

10%

15%

20%

25%

30%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Content per vehicle (Rs) YoY growth


Initiate with an OUTPERFORM and a TP of Rs4,820

We value the company on DCF basis. We assume that even post FY17, Wabco would be

able to deliver strong growth in content per vehicle. We assume an 8% CAGR in content

per vehicle and 8-10% growth in domestic CV volumes driving 16-18% growth in domestic

revenue for the company. We assume a similar growth on the exports and replacement

side. With these broad assumptions, we value Wabco at a DCF-based TP of Rs4,820.

For our DCF, we assume a WACC of 12.5%. Wabco has a beta of 0.65. We assume a

risk-free rate of 8% for the Indian market and 15% as the market return which gives us a

cost of equity of 12.5%. Given that Wabco is a debt-free company, we use that as the

WACC as well.

04 November 2014


Figure 64: Wabco has a very solid cash generation profile

Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22 Mar-23 Mar-24 Mar-25 Mar-26 Mar-27

Revenues 13,206 18,073 24,266 28,634 33,789 39,195 45,466 51,831 59,088 66,178 74,119 81,531 89,684

YoY 37 34 18 18 16 16 14 14 12 12 10 10

EBIT margin 12.9 15.7 17.4 17.0 17.0 17.0 17.0 17.0 17.0 17.0 17.0 17.0 17.0

EBIT 1,706 2,834 4,219 4,868 5,744 6,663 7,729 8,811 10,045 11,250 12,600 13,860 15,246

Taxes -512 -850 -1,266 -1,460 -1,723 -1,999 -2,319 -2,643 -3,114 -3,488 -3,906 -4,297 -4,726

Capex -600 -600 -600 -859 -1,183 -1,372 -1,591 -1,814 -2,068 -2,316 -2,224 -2,446 -2,691

Cash days -94.8 -89.1 -85.1 -90.0 -90.0 -90.0 -90.0 -90.0 -90.0 -90.0 -90.0 -90.0 -90.0

Working capital -3429 -4413 -5657 -7061 -8331 -9664 -11211 -12780 -14570 -16318 -18276 -20104 -22114

WC Change 467 984 1,244 1,404 1,271 1,333 1,546 1,570 1,789 1,748 1,958 1,828 2,010

Depreciation 354 389 428 859 1,014 1,176 1,364 1,555 1,773 1,985 2,224 2,446 2,691

FCFF 1,414 2,757 4,025 4,811 5,123 5,801 6,729 7,478 8,425 9,180 10,652 11,391 12,530

DF 1.00 0.89 0.79 0.70 0.62 0.55 0.49 0.44 0.39 0.35 0.31 0.27

PV 2,757 3,578 3,801 3,598 3,622 3,734 3,689 3,694 3,578 3,690 3,508 3,430


Investment risks

The key risk to our call is a slower-than-expected recovery in the CV cycle which would

put pressure on both volumes as well as content per vehicle. Knorr so far has been a

weak second player in the market; if Knorr is able to scale up faster than expected, that

too will have a significant negative impact on Wabco.

04 November 2014



Auto Parts & Equipment

Apollo Tyres

(APLO.BO / APTY IN) INCREASE TARGET PRICE

Raw material tailwinds to continue

■ Lower commodities should continue to drive strong margin expansion.

While rubber prices have been on a declining trend since FY12 and have

resulted in a 600 bp margin expansion from the bottom, they have corrected

a further 25% YTD. Given that rubber accounts for 40% of the input costs for

the company, on our analysis a 1% change in rubber impacts EPS by 1.8%.

In the past couple of months, crude prices too have fallen ~15%. The

sensitivity with crude is even higher since almost all the remaining input

costs are crude-linked resulting in a sensitivity of 1% change in crude

impacting EPS by >2%. While rubber benefits come with a lag of 2.0-2.5

months, the lag with crude is typically more than a quarter. The key remains

the pricing discipline of the industry in order to retain this benefit.

■ CV cycle recovery to help bring top-line growth back. Most indicators, be

it freight rates, resale values or actual M&HCV sales, are suggesting early

signs of an improvement in the CV cycle. Given that CVs constitute 70% of

the demand for the domestic tyre industry, with the recovery in CV cycle

after a couple of relatively muted years, one can expect double-digit top-line

growth going forward. Growth in the PV market which is also important for

Apollo has also picked up in the last few months after a gap of three years.

■ Valuations are still very reasonable. Apollo Tyres trades at 9x FY16E EPS

(where we have not assumed any benefit from decline in crude prices yet),

which is broadly in line with its long-term historical average. We also believe

that if the pricing discipline in the domestic replacement market sustains for

some more time, it can result in a re-rating of the sector as well. A sharp

decline in the European tyre market is the key risk for the stock.

■ Increase TP to Rs266; maintain Apollo as top pick in the India auto

components space. We increase our earnings estimates by ~7% as we

increase our FY16/17 margin assumptions for the standalone business to

14% (from 13.5% earlier) on continued benign RM. Our target price

increases to Rs266 (from Rs230) as we also roll forward to Sep-16E. Share price performance

0

50

100

150

200

0

100

200

300

400






Performance Over 1M 3M 12M Absolute (%) 16.7 24.1 215.3 — Relative (%) 11.8 16.6 184.3 —


Year 3/14A 3/15E 3/16E 3/17E Revenue (Rs mn) 133,138.5 140,626.0 161,636.7 181,556.5 EBITDA (Rs mn) 17,773.8 19,602.0 24,324.4 27,759.8 EBIT (Rs mn) 13,665.3 15,324.8 19,339.8 22,377.8 Net profit (Rs mn) 9,537.1 10,045.2 12,715.4 15,347.4 EPS (CS adj.) (Rs) 18.92 19.93 25.22 30.45 Change from previous EPS (%) n.a. 0 5.8 6.9 Consensus EPS (Rs) n.a. 21.0 22.8 25.7 EPS growth (%) 59.8 5.3 26.6 20.7 P/E (x) 12.1 11.5 9.1 7.5 Dividend yield (%) 0.33 0.44 0.44 0.44 EV/EBITDA (x) 7.1 6.6 5.7 4.9 P/B (x) 2.5 2.1 1.7 1.4 ROE (%) 23.9 19.9 20.8 20.5 Net debt/equity (%) 21.3 21.4 32.0 22.2


Rating OUTPERFORM* Price (03 Nov 14, Rs) 229.85 Target price (Rs) (from 233.00) 266.00¹ Upside/downside (%) 15.7 Mkt cap (Rs mn) 116,999 (US$ 1,905) Enterprise value (Rs mn) 128,813 Number of shares (mn) 509.02 Free float (%) 39.4 52-week price range 229.8 - 70.2 ADTO - 6M (US$ mn) 18.2




Research Analyst

Jatin Chawla

91 22 6777 3719

[email protected]

04 November 2014



Auto Parts & Equipment

Bharat Forge Limited

(BFRG.BO / BHFC IN) INCREASE TARGET PRICE

Strong growth but elevated multiples

■ Global CV markets barring India likely to slow down. Bharat Forge (BF)

is a play on global capex cycle with the company deriving ~50% of its

revenue from CVs spread across Europe, India, the US. Our US CV analysts

believe that the best of the NA truck cycle is behind us and the cycle is likely

to peak in CY15 by when volumes would have grown 163% from trough to

peak. Our European analysts believe the momentum in the EU economy

from 1H14 is now fizzling out. This coupled with Euro VI norms which add

€12,000 to the cost of each truck would mean truck sales will remain weak in

CY15 as well. The outlook for the Brazilian and Chinese markets are also flat

to 5% decline. Thus, India is the only market where we expect strong 30%

growth in CY15. For Bharat Forge, India CV is ~15% of sales and global

CVs is ~50%.

■ Structural shift towards higher-margin and higher-return businesses

continues. The company has been able to increase the share of non-autos

to 41% currently and plans to increase it to 50% in the next few years. It

focuses on five key non-auto segments—oil & gas, construction and mining,

power, aerospace, railways—and targets a US$100 mn revenue from each

segment in the next few years to grow non-autos from US$200 mn currently

to US$500 mn over the next four years. With tough emission norms globally

resulting in engine downsizing, the share of forging in passenger cars and

more specifically aluminium forgings should increase. BF is focusing on

increasing its PC share to 20% in the next few years. It has also consistently

been able to increase machining content which aids margins.

■ Increase TP to Rs830; maintain NEUTRAL. We increase our earnings

estimates by 6-8% on a faster-than-expected recovery in domestic CVs, and

increase target price to Rs830 (from Rs730), as we roll forward to Sep-16.

We retain our NEUTRAL rating, given the high valuations (trading at one-

year forward earnings of ~25x compared with the historical average of ~18x).

Share price performance

0

100

200

300

400

0

500

1000






Performance over 1M 3M 12M Absolute (%) 0.0 7.4 174.3 — Relative (%) -4.8 -0.2 143.2 —


Year 3/14A 3/15E 3/16E 3/17E Revenue (Rs mn) 67,161.2 70,852.1 86,929.0 100,900.4 EBITDA (Rs mn) 10,271.3 12,780.8 16,425.6 19,594.8 EBIT (Rs mn) 6,692.6 8,921.2 12,356.0 15,245.1 Net profit (Rs mn) 4,310.2 6,001.4 8,516.1 10,755.6 EPS (CS adj.) (Rs) 18.51 25.77 36.57 46.19 Change from previous EPS (%) n.a. 0.6 6.1 8.1 Consensus EPS (Rs) n.a. 26.9 36.0 44.6 EPS growth (%) 104.5 39.2 41.9 26.3 P/E (x) 43.9 31.5 22.2 17.6 Dividend yield (%) 0.6 0.9 1.1 1.3 EV/EBITDA (x) 20.5 16.1 12.3 10.0 P/B (x) 7.0 6.1 5.1 4.2 ROE (%) 17.5 20.8 25.1 26.3 Net debt/equity (%) 79.2 53.4 33.1 15.0


Rating NEUTRAL* Price (03 Nov 14, Rs) 811.80 Target price (Rs) (from 730.00) 830.00¹ Upside/downside (%) 2.2 Mkt cap (Rs mn) 188,982 (US$ 3,077) Enterprise value (Rs mn) 205,596 Number of shares (mn) 232.79 Free float (%) 53.0 52-week price range 921.6 - 284.4 ADTO - 6M (US$ mn) 12.0




Research Analysts

Jatin Chawla

91 22 6777 3719

[email protected]

Akshay Saxena

91 22 6777 3825

[email protected]

04 November 2014



Automobile Manufacturers

Ashok Leyland Ltd

(ASOK.BO / AL IN) DOWNGRADE RATING

Strong recovery already priced in

■ Downgrade to NEUTRAL. From its lows of Rs12 in Aug-13, Ashok Leyland

stock is already up ~4x in past 15 months. On our estimates which are

almost ~35% higher than consensus, the stock is almost trading at peak

multiples. We believe the risk reward is no longer favourable on the stock.

■ GST implementation represents risk to estimates. We believe

implementation of GST (the government is currently targeting FY17) would

be a negative development for the Indian CV companies. GST

implementation could free up freight capacity as movement of goods

between states eases up. While it would represent near-term downside on

CV industry volumes, it would also gradually result in a shift towards higher

tonnage and more sophisticated trucks. This could result in movement of

market share in favour of MNC players (Bhart Benz, Eicher Volvo) as their

product portfolio is more suited for the same.

■ CV cycle is recovering…The CV industry in India has seen a big slowdown

with the M&HCV industry declining ~25% in each of the last two years (FY13

and FY14). While things have bottomed out in 1H FY15 with CV volumes

staying flat YoY, we expect the recovery to pick up pace in 2H FY15 with

15% growth. We expect this growth to pick up further in FY16 when we are

expecting 30% growth in M&HCV volumes growth to pick up further in FY16

when we are expecting 30% growth in M&HCV.

■ …but that is already priced in. During previous upcycle periods of FY06-

FY08 and FY11-FY12, the stock has traded at an average one year forward

PE of 12x and one year forward EV/EBITDA of 8x. With the stock already

trading at those multiples on 24-month forward earnings, we downgrade the

stock to a NEUTRAL. For our TP of Rs48, we value the standalone business

at 13x Sep-16 and attribute a Rs5 per share value for the investments that

the company has made into various subsidiaries.

Share price performance

40

90

140

0

20

40

60






Performance over 1M 3M 12M Absolute (%) 10.7 31.7 157.6 — Relative (%) 5.8 24.2 126.6 —


Year 3/14A 3/15E 3/16E 3/17E Revenue (Rs mn) 99,434.3 113,338.1 150,099.6 174,171.4 EBITDA (Rs mn) 1,665.6 7,399.9 15,900.6 18,443.4 EBIT (Rs mn) -2,104.4 3,160.4 11,548.3 13,937.2 Net profit (Rs mn) 294.1 677.4 7,856.0 9,867.4 EPS (CS adj.) (Rs) 0.11 0.25 2.94 3.69 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (Rs) n.a. -0.21 1.62 2.64 EPS growth (%) -93.2 130.3 1,059.7 25.6 P/E (x) 422.6 183.5 15.8 12.6 Dividend yield (%) 0 0 0.61 0.61 EV/EBITDA (x) 107.5 23.4 10.6 8.7 P/B (x) 2.8 2.4 2.1 1.8 ROE (%) 0.7 1.4 14.2 15.5 Net debt/equity (%) 105.2 78.4 60.2 41.1


Rating (from Outperform) NEUTRAL* Price (03 Nov 14, Rs) 46.50 Target price (Rs) 48.00¹ Upside/downside (%) 3.2 Mkt cap (Rs mn) 132,333 (US$ 2,155) Enterprise value (Rs mn) 172,969 Number of shares (mn) 2,845.88 Free float (%) 45.0 52-week price range 46.5 - 15.2 ADTO - 6M (US$ mn) 12.2




Research Analysts

Jatin Chawla

91 22 6777 3719

[email protected]

04 November 2014


Company visit notes We met managements of 15 small-cap Indian auto component companies over the past

month. Most of these companies have a market cap in the range of US$100-500 mn. We

provide the profiles of these companies below, and later in the section we also have brief

write-ups on each of these companies. All data and outlook commentary provided on

these non-rated companies are from management.

Figure 65: Indian small-cap auto components companies—trailing valuations

Name Ticker Price (Rs) Market cap

(US$ mn)

3M price

performance

1Y price

performance

P/E

(trailing) (x)

EV/EBITDA

(trailing) (x)

Asahi India Glass AISG IN 125 506 43% 175% 16.5

Ceat Ltd. CEAT IN 870 521 75% 366% 11.6 6.3

Fiem Industries FIEM IN 701 140 16% 242% 22.5 10.8

Gabriel India GABR IN 83 200 60% 306% 28.1 13.9

Jamna Auto JMNA IN 133 88 17% 146% 38.0 12.1

JK Tyres JKI IN 498 341 67% 301% 8.0 5.7

Mahindra CIE MACA IN 219 340 43% 354%

Minda Corp MDA IN 555 178 47% 131% 42.1 14.7

Minda Industries MNDA IN 544 144 83% 224% 141.4 13.7

Rane Holdings RHL IN 571 136 46% 258% 17.5 5.9

Sona Koyo Steering SONA IN 61 203 55% 371% 14.3 8.6

Sundaram Clayton SDC IN 1,641 553 23% 462% 17.5 6.3

Sundram Fasteners SF IN 159 556 47% 271% 27.6 13.9

Suprajit Engineering SEL IN 122 244 9% 245% 28.8 16.4

Wabco India WIL IN 3,584 1,133 9% 117% 57.9 38.7

Note: Prices as of close of 3-Nov-14. Source: Company data, CMIE, the BLOOMBERG PROFESSIONAL™ service

Figure 66: Brief promoter profiles of the small-cap Indian auto components companies

Company About the promoter FY14 revenue (Rs Mn)

Asahi India Glass Set up in 1984 and jointly promoted by the Labroo family, Asahi Glass

Company Japan, and Maruti Suzuki 21,400

Ceat Ltd. Part of RPG Enterprise group which acquired CEAT in 1981, followed by a

number of companies in various businesses. 55,080

Fiem Industries Started by first-generation entrepreneur in 1989, only promoter company. 7,196

Gabriel India Flagship company of Anand group which has 19 companies in the auto

components space, but only Gabriel is listed. 12,745

Jamna Auto Started by first-generation entrepreneur in 1965, only promoter company

has technical tie-up with NHK Spring, Japan. 8,337

JK Tyres Part of JK Group of companies run by the Singhania family, which has

number of other businesses such as cement and paper. 76,517

Mahindra CIE Formed after the merger of Mahindra Systech (a subsidiary of Indian

conglomerate major—Mahindra) and Spanish company, CIE. 56,000

Minda Corp Flagship company of Ashok Minda group which was formed when Minda

group was split into two in 1995. 15,939

Minda Industries Flagship company of NK Minda group which was formed when Minda group

was split into two in 1995. 17,060

Rane Holdings Holding company of Rane group that started manufacturing in 1960 and has

ten different companies in the auto parts space. 19,034

Sona Koyo Steering Indo-Japanese venture—a flagship Soya group company (which has 2 more

companies in the auto parts space); in a tie-up with JTEKT, Japan. 14,923

Sundaram Clayton Part of TVS group which has several auto component companies other than

the flagship TVS Motors. 11,968

Sundram Fasteners Part of TVS group which has several auto component companies other than

the flagship TVS Motors. 27,360

Suprajit Engineering Started by first-generation entrepreneur in 1987, only promoter company. 5,450

Wabco India Subsidiary of US multinational, WABCO holdings 11,107


04 November 2014


Suprajit Engineering (Not Rated)

About the company: Suprajit is the largest two-wheeler cable manufacturer in the world

and also ranks among the top-five companies globally in cable manufacturing. It was

started by Mr Ajith Kumar Rai (a first generation entrepreneur) in 1987. It began as

supplier to TVS Motors but since then has emerged as a leading supplier to all 2W OEMs.

The company has 13 plants across the country and one in the UK (with the acquisition of

Gills Cable in 2006).

It largely derives its revenues from the OEM segment. In FY14, 55% of revenues came

from the 2W segment, 30% from other autos (equally split between PVs and CVs), 10%

from replacement and 6% from non-autos. The share of 2Ws has come down over the

years (from 97% in FY02). As for the products, it derives 90% of revenues from cables

with the rest being speedometers and other components.

Competitive positioning: The total automotive cable market size in the country is Rs12

bn (of which Rs4 bn is replacement). While it is the dominant supplier to the OEM industry

(~50% share in 2Ws and ~25% in 4Ws), its share in the replacement market is much lower

at ~15%. As per company one of the reasons for this, is that more than 50% of the

replacement market is unorganised and unbranded. For 4Ws, the replacement market size

is smaller, as typically cables are replaced at the dealers’ end and they have to buy them

from OEMs only. While the company has a large dependence on the 2W segment, within

that it caters to all the major players—Hero, Bajaj, TVS and Honda. Hence, it is reasonably

diversified in terms of customer base with no single customer constituting more than 20%

of revenues.

Cable is comparatively a low technology product with low automation; hence, its main

competitive advantage stems from having an efficient cost structure. The company has

multiple plants across the country, which are in close proximity to customer plants and this

lowers freight costs. There are also unique design requirements for cables of different

models and the company has developed expertise in this while maintaining consistent

quality. It has an economies-of-scale advantage, too, given the large scale which allows

competitive sourcing and has also set up plants in Uttaranchal to make use of VAT benefit

in the state. According to management, it has ~15% cost advantage over peers, such as

Hi-lex, Remson etc. These factors have enabled it to grow share in both 2Ws and 4Ws

Figure 67: Company has grown revenues at 20%+ CAGR

maintaining margins at 17% levels

Figure 68: Company has diversified its mix from 2W's into

4Ws and replacement

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

-10%

0%

10%

20%

30%

40%

50%

60%


Topline Growth YoY (%) EBITDA margins (RHS)

0%

20%

40%

60%

80%

100%

2Ws Other Autos Replacement Non Autos

Mix in FY02 FY14

Source: CMIE Prowess Source: Company data

04 November 2014


Growth outlook: In the last decade, the company has outperformed the industry with a

10-year revenue CAGR of >30% led by market-share gains, with entry into new segments

such as 4Ws and increasing penetration within 2W customers. Management expects top-

line growth of 20% this year, as it continues to target new segments (non-autos and

exports) and launch new products. It sees both the 2W and 4W OEM industry growing at

~10% for the year. Moreover it expects higher growth opportunities from replacement—

typically, the replacement cycle is 2.5 years in 2Ws and four years in 4Ws, but it is

dominated by the unorganised sector. To tap this opportunity, it already has a pan-India

presence with 300 distributors

Margin levers: The company’s margins have remained relatively stable at ~15% in the

past few years with healthy ROEs of ~25%. Steel wires constitute most of the raw

materials at 50%, with the rest being rubber, PVC, etc. Given its dominant position, the

company says it has good bargaining power with OEMs and is able to pass through most

of the cost increases, which reflects in its stable margin performance across cycles. It also

says that it has similar margins across segments (margins in replacement higher by just 1-

2%) so there shouldn’t be any margin impact from a changing mix.

It is already operating at more than 90% utilisation and as per company it will be

increasing cable capacity to 225 mn units per year (from the current 150 mn). Given the

already high utilizations, there shouldn’t be major operating leverage benefits in a

recovery. This is, however, a low capital-intensive business and even with steep increase

in capacity, management is guiding for just Rs600 mn capex for two years.

Other points to note: The company continues to de-risk its business model and expects

its share of exports, non-autos and new products to continue growing. Exports are

undertaken by the Bangalore plant, with the share of domestic revenues already having

fallen from ~100% in FY02 to ~86% now. Exports are primarily to Europe and North

America (largely 4Ws). The company says that the lower labour and administrative costs

in India put it at an advantage over foreign players. The non-auto share also increased

from 0% in FY02 to ~6%. Tractors (the company is a large supplier to John Deere both

India and globally) and off-road vehicles form the main component here. The company has

also put a thrust on developing new products, such as indicators, speedometers, gear

shifters, etc.

Figure 69: Suprajit historical financials

Rs Mn FY09 FY10 FY11 FY12 FY13 FY14

Net Sales 2,062 2,484 3,471 4,238 4,621 5,426

Growth YoY (%) 15% 21% 40% 22% 9% 17%

EBITDA 315 470 587 708 806 947

EBITDA margins (%) 15.3% 18.9% 16.9% 16.7% 17.4% 17.4%

PAT 90 222 333 398 471 508

Growth YoY (%) -2% 146% 50% 20% 18% 8%

ROE (%) 16% 32% 34% 31% 28% 25%

Source: CMIE Prowess

04 November 2014


JK Tyres (Not Rated)

About the company: JK Tyre is India’s largest truck and bus radial (TBR) tyre

manufacturer. It is part of the JK group of companies (run by Singhania family which also

has other varied businesses in industries, such as cement, paper, etc). JK Tyres has been

in existence for more than 50 years and has six plants in India and three in Mexico (with

the acquisition of Tornel).

Its total capacity is 20 mn tyres per annum: 13.4 mn in India and 6.6 mn in Mexico. Indian

operations form ~80% of the revenues with CVs constituting the main segment. CVs

formed ~80% of the revenues in FY14, followed by PVs at ~15% with the remainder being

farm/OTR (off-road). The company has no presence in 2Ws/3Ws. As with any other tyre

company, the replacement segment is the major end market. The share of replacement

was 63% in FY14 followed by OEM at 23% and exports at 15%.

Competitive positioning: India's tyre industry is competitive with a large number of

domestic and foreign players, along with additional competition due to imports from

countries such as China. JK Tyres is the largest player in the TBR segment with a 34%

share. While Apollo has a 30% share in TBR, all other tyre players have shares of less

than ~10% here. Among other key segments, JK Tyres has a 20% share in truck bias and

13% share in car radials (PCR). The top Indian players generally tend to have similar

pricing at a slight discount to global majors like Michelin, Bridgestone, etc. There is not

much of difference in brand positioning; hence it becomes important to have a strong

distribution network. JK Tyres has a network of 4,000 dealers across the country of which

1,000 are exclusive.

Figure 70: JK Tyres has seen a 600 bps margin expansion

in last two years on benign RM (rubber)

Figure 71: Company is the leader in radial segment

(towards which market is shifting) in CVs

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

0%

5%

10%

15%

20%

25%

30%

35%

FY08 FY09 FY10 FY11 FY12 FY13 FY14


JK Tyres34%

Apollo29%

MRF13%

Birla6%

Ceat6%

Others12%

Market-share in radial tyres


Growth outlook: The company’s standalone revenues have grown in single digits for the

past three years and it now expects acceleration driven by a recovery in OEM demand,

the increasing trend of radicalisation and a pick-up in replacement demand due to the

economic revival. In the CV OEM segment (which has seen a big slowdown in the past

two years), it sees modest growth in FY15 followed by sharp ~25% growth in FY16. It also

expects the PV industry to return to ~12% trend growth rate after three subdued years.

Replacement growth also slowed to low single digits in both CVs and cars in FY14, but

should improve to 6-8% for CV replacement and 10% for car replacement, according to

management.

04 November 2014


The other growth driver would be a continued radialisation trend. Truck tyre radialisation in

the country has moved up from 6% in FY08 to 27% in FY14. However, India still lags the

world average greatly, given the cost-benefit ratio of radial tyres (more so for long-duty

heavy trucks) and the company expects its share of radial to continue inching up and

reach 70% by FY18. Given its higher share in radial tyres radicalisation is positive for the

company. The company targets to double consolidated revenues in four years (from

~US$1.4 bn in FY14 to US$3 bn in FY18E).

Margin levers: Rubber is the main raw material constituting ~50% of raw materials while

the other ~50% is crude-linked derivatives. A steep decline in rubber prices in the past two

years has led to an improvement in margins for all tyre companies—standalone margins

for JK Tyres nearly doubled from ~5% in FY12 to ~10% in FY14 driven by a gross margin

improvement. This cycle also saw remarkable pricing discipline in the industry with players

retaining most of the RM benefit. Given that the outlook for rubber prices should remain

benign for some time, this should support company's margins, according to management.

It should also see small operating leverage as utilisation in the standalone business was

~80% in FY14 (higher for radial at ~85% and lower for bias). The bigger improvement in

utilisation will come from the Mexico entity where it has already improved utilisation from

40% a few years ago to 70%, but there is still scope for improvement. As the share of

radial tyres is expected to continue to increase, the company is increasing capacity at the

Chennai plant—2 mn tyres/year capacity expansion for PCR and 0.8 Mn capacity

expansion for TBR at a total capex of Rs15 bn. According to the company, margins on

radial tyres are higher by 300-400 bp over bias tyres. So, the shift from bias to radial for

truck tyres should improve mix. The share of bias to radial is 65:35 and is expected to

move to 35:65 in a few years, and this will be another margin driver. We do note that this

may put pressure on bias tyre pricing as there will be lot of excess bias tyre capacity. The

company says it will convert part of this to tractor and industrial tyres.

Other points to note: The company bought out the Mexican company Tornel in 2008 (for

US$68 mn) to gain access to North America and emerging Latin American markets. It is

already exporting to these countries. It has >50% share in truck bias and 10% share in

PCR in the country.

Figure 72: JK Tyres historical financials

Rs Mn FY10 FY11 FY12 FY13 FY14

Net Sales 45,608 59,487 67,635 68,262 76,435

Growth YoY (%) 23% 30% 14% 1% 12%

EBITDA 5,033 3,264 3,220 6,325 8,807

EBITDA margins (%) 11.0% 5.5% 4.8% 9.3% 11.5%

PAT 2,195 626 -382 1,968 2,556

Growth YoY (%) -71% 30%

ROE (%) 41% 8% -5% 22% 23%


04 November 2014


Jamna Auto (Not Rated)

About the company: Jamna Auto is the largest supplier of leaf springs for commercial

vehicles in the country with a ~60% share of the OEM market. It makes two kinds of leaf

springs: conventional and parabolic. A leaf spring is a simple form of spring commonly

used for the suspension in vehicles. It acts as a linkage for holding the axle in position.

While cars have shifted to using coil springs nowadays, leaf spring is usually used

generally only in heavy commercial vehicles such as vans and trucks. Since they provide a

stiff suspension, buses have moved to parabolic leaf springs which have fewer leaves with

less thickness and thereby provide better comfort.

While conventional springs form 85% of its sales, the market is gradually moving towards

parabolic springs even for trucks. 85% of its revenues are from the OEM segment where

Jamna has almost a ~60% market share. Aftermarket and exports (currently 2%)

contribute to ~15% of revenues for the company. For the consumer, the cost of parabolic

springs, which are lighter than conventional springs, is broadly similar to conventional

springs. However, Jamna's realisations on parabolic springs are higher than for

conventional springs, as parabolic springs are lighter and hence consume less steel,

resulting in better per kg realisations and margins for the company.

Competitive positioning: Overall, the company has a ~60% plus market share within

OEMs. It has 100% shares with Ashok Leyland and Bharat Benz, and a 50% share with

Tata Motors (which it is gradually ramping up to 65% this year). As can be seen with its

market share with all the large CV players, Jamna is the largest player in the market by a

wide margin.

Figure 73: Jamna's top line was impacted in the last two

years on CV slowdown

Figure 74: Market is moving towards parabolic springs

(currently ~15% only) on which realizations are higher

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Growth outlook: As the entire business of Jamna Auto comes from the CV segment, it is

highly leveraged to the CV cycle. In the past few years, management has focused on de-

risking the business a little by focusing on exports and the replacement market. On

exports, the key markets for the company are Russia and Bangladesh, and management

sees a huge opportunity there. On the replacement side, the company says it has focused

on the distribution side. It has made some senior-level appointments and the replacement

business has seen a 30% CAGR in the past few years. It also says it has good distribution

in Western and Northern India, but no presence in southern and eastern India.

04 November 2014


The life of a leaf spring is no more than one year and hence there should be a large

replacement market for the product; however, most of this is captured by the unorganised

segment. Given that the total truck population is almost 8-10x annual CV sales and

despite the 40% cheaper pricing by the unorganised segment, the total market size is fairly

significant at almost ~Rs100 bn. But on the replacement side, the share of organised

players is less than 10%; hence, the main trigger here is a shift from the unorganised to

organised segment. According to management, this will be a gradual process, as the

unorganised segment has ~40% cheaper pricing compared to the company; however the

quality of the products is not comparable with Jamna Auto products.

Margin levers: The company's margins on the replacement and export side are better

than for OEMs, with management advising those for the replacement side being ~200 bp

better than for the OEM side. On the product side, the margins for parabolic springs are

better than for conventional springs, according to management, which expects the share

of parabolic springs and that of the replacement and export side to increase and hence the

mix to be a positive driver of margins.

The company has a capacity of 180,000 MT p.a. and says it is targeting to increase this by

30,000 MT p.a. by the end of FY15. This requires capex of Rs500m, according to

management. It is also planning to install some balancing equipment at its Hosur plant to

increase capacity by 15,000 MT p.a. by the end of FY15. Thus, for FY16, the company

says it will have a capacity of ~225,000 MT at its disposal.

The company is running at ~65% utilisation. According to management, a 10%

improvement in utilisation adds only ~50 bp to margins, as during a fast ramp-up, costs

also tend to rise. The company was focused on reducing its break-even level in the

previous downturn and has been successful in bringing it down from 9,000 MT per month

to 7,000 MT per month. According to management, given the company's dominant

position in the market, it usually has no problems in passing on increases in raw material

prices.

Others: In the long term the company has a Lakshya 33 programme under which it wants

to increase the share of replacement and exports to 33% of revenues. It also wants to limit

contributions from a single customer to <33%. On the replacement side, management is

targeting a 33% CAGR sales over the next five years.

Figure 75: Jamna Auto historical financials

Jamna FY09 FY10 FY11 FY12 FY13 FY14

Net Sales 4,595 6,132 9,031 11,177 9,800 8,330

Growth YoY (%) -2% 33% 47% 24% -12% -15%

EBITDA 370 803 1,109 1,183 925 534

EBITDA margins (%) 8.0% 13.1% 12.3% 10.6% 9.4% 6.4%

PAT -196 110 372 422 277 138

Growth YoY (%) 237% 13% -34% -50%

ROE (%) -50% 22% 29% 28% 16% 8%


04 November 2014


Fiem Industries (Not Rated)

About the company: Fiem Industries is India's largest manufacturer of two-wheeler

automotive lighting and rear-view mirrors and was founded in 1989 by Dr. J.K. Jain (a first-

generation entrepreneur). The company has diversified into non-auto segments: LED

lighting (bulbs, tube lights, etc.) and integrated passenger information systems (LED

displays for buses, railways, etc.). It has eight plants across the country (four in the north

and four in the south), and is also opening up a new plant in Gujarat close to HMSI's new

plant.

The non-automotive segment is a recent foray (three years old) and it is the core

automotive segment contributing to ~95% of revenues though as per company, this will

change in future. Within autos: lighting (head lamps, tail lamps, signalling lamps, etc.) is

the major part contributing to ~70% of revenues followed by rear-view mirrors (~13%) with

the rest being plastic moulded and sheet metal parts. 2W is the primary segment forming

~90% of revenues with the rest (~10%) being 4Ws and exports. Sales are largely to

OEMs, with the replacement segment forming less than 10%.

Competitive positioning: Fiem is a dominant player in 2W lighting and rear-view mirrors,

with the company having >75% share of business of players such as HMSI (Honda), TVS,

Suzuki and Royal Enfield for these components. The two large OEMs not served by the

company are Hero and Bajaj, both of which have promoter group companies catering to

the same. For Bajaj, this is Varroc and for Hero it is Unitech. Hence Fiem has a relatively

dominant share and low competition in its addressable segment (2Ws ex. Hero, Bajaj). In

addition, it doesn't has any big competitor in rear view mirrors. While there are other large

players in automotive lighting such as Lumax, IJL (India Japan Lighting) and Minda

industries, 4W is the main segment for all them. Honda is Fiem's largest customer,

contributing to ~44% of company's revenues followed by TVS at ~25%.

Management says that the company has an advantage in lighting, as it has built up

technological capabilities in design and testing. Being in the industry for so long, they have

developed many designs and undertaken in-house R&D for more than 10 years so it has

expertise. They also have a cost advantage, as everything is being done in-house with

only basic parts being procured. It says this should also help the company grow the LED

luminaries' business which is much more competitive than 2W auto lighting as there are

10-12 large players.

Figure 76: Fiem has experienced ~30% sales CAGR in last

five years driven by share gains for its key client Honda

Figure 77: Management expects exponential growth in

LED business which will become over ~50% of revenues

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04 November 2014


Growth outlook: Fiem has experienced ~30% sales CAGR in the past five years, ahead

of 2W industry growth, driven by market share gains for its key client Honda. The company

expects both the 2W and 4W markets to grow at 10-12% p.a. until 2020 after which the

2W industry growth rate would slow, due to high penetration, while 4W would continue

growing.

However as per company the high growth story for the company is the non-auto business:

LED luminaries and integrated passenger information systems, with the company

extremely bullish about both given the large opportunity size. Although management

advises that LED bulbs have higher upfront costs, their life expectancy and energy

efficiency are much higher than for CFL or traditional incandescent bulbs (which are

largely used in India currently). It is a similar trend for any public transport systems, with

railways, buses or aeroplanes all showing greater usage of LED displays,. The company is

also now qualified to receive bulk tenders from the government in both these segments

(LED luminaries and passenger information). It expects the share of these segments to

grow to ~50% of revenues in 4-5 years from the current ~5%, implying exponential growth.

This year itself, as per company LED business will grow from Rs400 mn to Rs 1 bn.

According to management, the LED lighting industry in India is forecast to grow to Rs160

bn in a few years, while integrated passenger display systems grow to Rs200 bn. It says

even if the company were to gain a small market share, this would mean large growth

(FY14 revenues for company were Rs 7 bn).

Margin levers: Management expects shift of mix towards LED to also aid margins.

Margins in LED luminary are higher at ~18% compared to ~12% in the auto division.

Currently, it is operating at 60-70% utilisation of its capacity, so utilisations should improve

as growth picks up. Its return ratios were also on the lower side between 10% and 15% in

the last few years as it had spent Rs2.5 bn in plant modernisation but returns should

improve with lower incremental investments for some time. The company is guiding for

capex of Rs 700 Mn for FY15 (out of which Rs500 mn is for new Gujarat plant). Going

forward the company's capex outlay will depend on the growth in the LED industry. The

main raw material is plastic powder, while import content is very less. Any changes in RM

cost which are more than 5% (either increase or decrease) are pass-through to OEMs.

Other points to note: While the company is dominant in 2W lighting it is also looking to

grow into other segments beyond that. As per the company, most of the 4W companies in

India are MNCs. These MNCs want their local suppliers from home countries to cater to

their overseas operations in countries such as India. These suppliers in turn look at

forming JVs with Indian auto component players, for instance, IJL has a partnership with

Koito manufacturing to serve Japanese OEMs. Fiem is also looking to get a foothold in the

4W market and has entered into MoUs for establishing JVs with group companies of

Honda (Honda Locks) and Toyota (Toyota Tsusho Corp). The tie-up with Yamato

industrial should enable entry in to new segments of autos such as control cables, wires

among others, according to management.

Figure 78: Fiem Industries historical financials

Fiem FY09 FY10 FY11 FY12 FY13 FY14

Net Sales 2,197 2,946 4,202 5,331 6,017 7,176

Growth YoY (%) 24% 34% 43% 27% 13% 19%

EBITDA 221 340 594 737 730 885

EBITDA margins (%) 10.1% 11.5% 14.1% 13.8% 12.1% 12.3%

PAT 46 108 114 211 273 374

Growth YoY (%) -51% 133% 6% 85% 29% 37%

ROE (%) 6% 11% 10% 16% 18% 20%


04 November 2014


Gabriel India Ltd. (Not Rated)

About the company: Gabriel India incorporated in 1961 is the flagship company of Anand

group. The group operates 19 companies in the automotive components business (many

of them in tie-ups with global players); Gabriel is the only listed company among them.

Gabriel is one of the leading players in ride control product (shock absorbers, front forks

etc). It gets 86% of its revenues from OEMs, 11% from aftermarket and 3% from exports.

It has six manufacturing plants across the country which are located in close proximity to

OEMs. Within auto segments, bulk of the revenues come from the two/three wheeler

segments at 60% followed by passenger vehicles at 30% and commercial vehicles at

10%.

Competitive positioning: Gabriel is among the leading players in the shock absorber

segment in the country, it has ~70% market-share in CVs, 30% in passenger vehicles and

25% in 2Ws. In the 2W segment (which constitutes for the maximum share of its

revenues), it is a big supplier to likes of Honda, TVS, etc., and also the second biggest

supplier to Bajaj. Both Bajaj and Hero are largely served by promoter group companies –

Bajaj (Endurance) and Hero (Munjal Showa, largest player). Its customer base is

reasonably diversified with no single OEM constituting more than ~20% of the revenues

for the company.

Given the nature of product – customised design for each model and elaborate testing

procedure, PVs and CVs OEMs typically prefer only one supplier for a model hence

relationships are longer. The company sees low threat of increasing competition – the

industry has always been highly consolidated, and there is hardly any threat of imports,

with OEMs generally preferring local players when setting up shop in India.

Figure 79: Gabriel has grown in line with 2W industry

growth maintaining margins at ~7%

Figure 80: Gabriel gets highest revenues from 2Ws even

though it has higher market share in CVs and PVs

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Growth outlook Management expects to grow in line with the industry growth in the OEM

segment. It expects the 2W segment to continue to do well and is also seeing momentum

coming back in passenger vehicles. It is hopeful that CV growth should also come back

soon. Other than this, the company also aims to increase focus on exports and after-

markets (which currently form less than 15% combined).

Typically, shock absorbers in 3Ws are replaced after two years, in 2Ws after three years,

PVs after five years and CVs even more as ride comfort is not a major criteria for CVs

(given that owners are not the drivers). Currently, the after-market in shock absorbers is

largely unorganised and therefore they are ~40-50% cheaper. The company is hopeful of

customers shifting to organised products as they become more brand conscious. Key

04 November 2014


factors which will help the company in this regard are its brand strength and reach (has a

network of 300 dealers and 5k retailers across the country). Exports are currently

negligible for the company but it hopes to gain foothold on account of lower labour costs in

India.

Margin levers: Main raw materials are oil and steel, and most of the contracts are pass-

through with a three to six month lag. It has ~10% import exposure which is little bit

hedged. The company is currently operating at ~55% utilisation in both PVs and CVs and

~75% utilisation in 2Ws, and so it should reap operating leverage benefit as the country's

economy revives.

It also has focus on improving profitability – recently there was a restructuring of divisions

to streamline costs. It is moving towards standardisation of manufacturing processes

across factories in order to reap scale advantage. It has also done lot of R&D investments

in the past and via technology leadership aims to lower costs which will benefit both itself

and the customers.

Other points to note: Given the large number of other companies in the group catering to

different automotive products, Gabriel will stick to shock absorbers and is unlikely to enter

new segments, according to management. Given the low level of utilisations currently, it

has low capex requirement and is guiding for ~Rs 300 mn capex spend for the year.

Figure 81: Gabriel India historical financials

Gabriel FY09 FY10 FY11 FY12 FY13 FY14

Net Sales 5,256 7,026 9,697 11,273 12,035 12,819

Growth YoY (%) 11% 34% 38% 16% 7% 7%

EBITDA 332 657 898 1,007 802 898

EBITDA margins (%) 6.3% 9.4% 9.3% 8.9% 6.7% 7.0%

PAT 56 240 453 531 381 426

Growth YoY (%) -27% 329% 89% 17% -28% 12%

ROE (%) 4% 16% 24% 23% 15% 15%


04 November 2014


Sona Koyo Steering Systems (Not Rated)

About the company: Sona Koyo Steering is India's leading manufacturer of steering

systems for passenger cars with a ~50% market share. Established in 1986, it is the

flagship company of the Sona group. The company was formed as a technical

collaboration with the Japanese major JTEKT corporation (earlier known as Koyo Seiko,

JTEKT has a 20% stake in Sona Koyo). The company started as a supplier to Maruti

Suzuki (with Maruti too having a 7% stake in it), but over the years has diversified into

different OEMs.

Steering systems constitute bulk (~90%) of its revenue, while drivelines, which are not a

focus area, comprise the remaining 10%. The company gets 90% of its revenue from the

domestic OEM segment (primarily passenger vehicles which constitute 95% of the

domestic business, with CVs and tractors contributing the rest). Exports form the

remaining ~10% of the company's revenue.

Competitive positioning: Sona Koyo supplies dominant parts of steering system

requirements (over 80%) for players such as Maruti, M&M, Toyota, and Nissan. Steering

system is a comparatively high technology product and OEMs prefer suppliers who are

well established globally. Hence, the strong players are all foreign majors or local players

in tie-up in them. After Sona Koyo, the biggest player is Rane group (which has tie-ups

with TRW and NSK), followed by Mando (a Korean company which is supplier to Hyundai

in India), and German company ZF (which primarily supplies to CVs in India).

According to the company, the tie-up with JTEKT is the key advantage that it has, given

that JTEKT is a leading global player in this space with a ~30% market share. It already

has relationships with several OEMs globally—these MNCs, when setting shop in India,

prefer Sona Koyo. While the share of Maruti to the company's revenue has come down

over the years, it is still the key client, constituting about 45% of its business, followed by

M&M at 15%.

Figure 82: Company has had ~15% CAGR growth in line

with the PV OEM industry

Figure 83: It gets most of its revenues from steering

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Growth outlook: Management has stated that passenger vehicle growth in the country

has surprised its expectations. It was earlier expecting 6-8% industry growth for the year,

but now growth should be in double digits, and Sona Koyo should grow in line with that.

According to the company, given the nature of the product, there are significant cost and

effort involved, as it takes two years to develop steering systems for a vehicle in

partnership with that OEM. Hence, relationships are typically sticky and once you have a

contract with an OEM for a model, it is there for a lifetime.

04 November 2014


The life span of a steering system is same as that of a vehicle (unless it meets with an

accident); so after-market opportunity is low. Even then a company's agreements with

OEMs forbid it to sell these in the open market. Management claims, Sona Koyo has seen

substantial improvement in realisations with a shift from manual steering to power steering

in the country (although profit/unit on both is similar on higher import content in power

steering). So it sees some replacement opportunity here (shift from manual to power);

also, the company could stand to benefit if CCI clamps down on OEMs which are

forbidding suppliers from selling in the open market.

Margin levers: The company is currently operating at ~65% utilisation, so management

believes there should be an operating leverage benefit with a demand recovery. The

nature of product import content is high, particularly in power steering; however, the

company's localisation efforts, as management claims, have brought this down to 18%

(from around 30% a few years back). While it plans to continue on these efforts, it believes

import content can't be brought down below 15%. Management is guiding for a Rs800 mn

capex for the year which is similar to last year's. The key raw materials are steel (40%)

and aluminum.

Other points to note: The company has two subsidiaries, in which JTEKT has a higher

50% stake, to manufacture CEPS (column electric power steering) as it is a high-end

technology in which OEMs want direct warranty from JTEKT (hence carved out as a

subsidiary in which JTEKT had a higher stake), according to management. The company

has developed a patented technology: EPAM (electric power asset module), which is

applicable for off-highway and tractor segments. Electric power steering is a new thing for

tractors; hence, the company wants to exploit that opportunity. Management said that the

company will also target export markets through this and already has contracts from

players such as John Deere. EPAM is the only main diversification area of the company as

of now, and the company aims to grow this to ~Rs2.5 bn in 3-4 years (current top line:

Rs15 bn).

Figure 84: Sona Koyo historical financials

Sona Koyo FY09 FY10 FY11 FY12 FY13 FY14

Net Sales 6,947 8,548 12,060 14,202 14,581 14,912

Growth YoY (%) 1% 23% 41% 18% 3% 2%

EBITDA 154 815 1,460 1,854 1,734 1,837

EBITDA margins (%) 2.2% 9.5% 12.1% 13.1% 11.9% 12.3%

PAT -316 162 491 601 480 863

Growth YoY (%) -227% -151% 204% 22% -20% 80%

ROE (%) -16% 8% 20% 21% 15% 22%


04 November 2014


Minda Corporation Ltd. (Not Rated)

About the company: Minda corporation is the flagship company of Ashok Minda group.

The Minda group was formed by Shri S.L. Minda in 1958. It grew into a leading automotive

component player in the country before splitting up into Minda industries (NK Minda group)

and Minda corporation (Ashok Minda group) in 1995. Minda corp primarily manufactures

three main systems of the vehicle: automotive security (electronic, mechanical locks, etc)

which forms ~40% of its revenue; driver information (instrument cluster, wiring harness,

etc) which forms ~35% of revenue; and plastic interiors which form the remaining ~25%.

2W and 3W segments constitute its major revenue source with ~40% of revenue, followed

by PVs at ~30%, CVs at ~18% and the remainder being replacement revenue.

International business accounts for a third of its revenue, with Europe being ~25% and

South-Asia at 8%. Other than 20 manufacturing facilities in India, the company has two

plants in South East Asia (Indonesia, Vietnam) and two in Europe (Germany and Poland).

The German presence came through its acquisition of KTSN in 2008, as the company

wanted to enter the plastic interior business. It went for the acquisition, instead of setting

up a green-field plant, to directly acquire the technology, and the fact that KTSN's plant is

in East Germany where labour costs are lower according to management.

Competitive positioning: Minda is the third- or fourth-largest player in most of the

segments that it operates as per management. In very few of these segments, it is the

dominant player (e.g., in wiring harness, Minda is the second-largest player after

Motherson Sumi). Management said that the key advantages in the industry are having a

low-cost structure (given the competitive nature, OEMs are cost conscious), and also tie-

ups with foreign players (to get technology and also OEMs' trust). Foreign OEMs when

they set up shop in India ask their local suppliers from their respective home countries to

come along. Hence, management believes there is a trend towards JVs/partnerships for

Indian component players with foreign players as then they get preference from OEMs.

Over the longer term, there has been a trend towards consolidation—given the way

technology is evolving smaller players would find it difficult to compete, as per company.

The company claims to have a diversified customer base, supplying to most of the major

2W and 4W OEMs in India along with most of the German OEMs through its Germany

plant. It stated that Bajaj, M&M, and Volkswagen are the three biggest clients on a

consolidated basis, forming ~35% of its revenue.

Figure 85: Company's top line very volatile as it gets

distorted by consolidation of group entities/ exit of

unprofitable businesses

Figure 86: Company has largest exposure to India

followed by Europe

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Growth outlook: The company sees positive sentiment returning to the auto OEM

industry and expects 2Ws to grow at 15-20% for the year, PVs at 10-15%, and CVs too

should start growing now with government spending set to increase. This should lead to

10-15% top-line growth for the company; it has no plans of entering new segments as of

now, but may re-think about it if the economy recovers fast. Minda has limited presence in

the replacement segment according to management, given that it is dominated by the

unorganised segment which is of much inferior quality and can sell at much lower price

points. Moreover, the company has to sell directly to OEMs as per their contracts and then

they sell to dealers; so it should reap advantage if the CCI order regarding availability of

spares is implemented, according to management.

Margin levers: The company’s focus is on increasing utilisation levels and optimising the

cost structure. Its current utilisation is ~75% in India and ~90% in Europe. Other than that

it has also exited some of the unprofitable businesses (such as one subsidiary in Europe,

surface plating and finishing business in India) and is streamlining internal operations

(e.g., both the security systems and driver information plant in Pantnagar consolidated),

according to management. Margins and return ratios are similar in all its key segments,

although some of these like interiors are more capital intensive while wiring harness is

more labour intensive. Copper, zinc, and brass are the main raw materials. OEMs such as

Maruti are encouraging them to go for greater localisation by retaining 50% of the benefit.

As of now, the company hedges all the FX exposure.

Other points to note: Given the complicated structure and number of group companies it

has, there have been efforts in the past few years to simplify it through restructuring/

consolidation of entities, according to management. Last year, Minda Corp took majority

stakes in Minda Furakwa, and Minda Valeo. So most of the promoter-owned companies

have now being brought under Minda Corp only. The company stated that all these

transactions were cash neutral with preference shares being issued to promoters and no

cash was taken out of the company. Management has guided for Rs200 mn of capex at

the standalone level and Rs1,200 mn at the group level.

Figure 87: Minda corporation historical financials

Minda Corp FY09 FY10 FY11 FY12 FY13 FY14

Net Sales 4,522 5,287 7,266 13,666 21,700 15,887

Growth YoY (%) 146% 17% 37% 88% 59% -27%

EBITDA 446 488 811 1,357 1,104 1,331

EBITDA margins (%) 9.9% 9.2% 11.2% 9.9% 5.1% 8.4%

PAT 161 192 347 515 50 784

Growth YoY (%) 111% 19% 81% 48% -90% 1480%

ROE (%) 29% 26% 14% 17% 2% 21%


04 November 2014


CEAT Ltd. (Not Rated)

About the company: CEAT Ltd. is India's fourth-biggest tyre manufacturer. It is a part of

RPG Enterprises group which was established in 1979 by Mr RP Goenka and had

acquired CEAT Tyres in 1981. The company has six manufacturing facilities (including one

in Sri Lanka) with total capacity of 720 MT. Among the segments, M&HCVs forms the

major part, constituting ~46% of revenue followed by 2Ws at 17%, LCVs at 14%,

passenger vehicles at 9%, tractors at 8%, and speciality tyres at 6%. Like any other tyre

company, replacement segment is the major end-market. Share of replacement was 58%

in FY14, followed by OEMs at 22%, and exports at 20%, according to the company.

Competitive positioning: The Indian tyre industry is competitive with a large number of

domestic and foreign players along with additional competition due to imports from

countries such as China. CEAT is overall the fourth-biggest tyre player in the country but

has a strong positioning in the 2W segment where it is the second-largest player with a

24% market share (MRF is the largest). Players such as Apollo Tyres, JK Tyres are

absent from the 2W segment. In the other segments, CEAT has 13% share in truck bias,

10% share in passenger car radials, and high-single-digit share in truck radials. The

company claims that it has made significant inroads in increasing its market-share in 2Ws,

from 8% a few years back to 24% currently.

According to management, CEAT's positioning is stronger in 2Ws where it is able to

command a 2-3% price premium over the market leader MRF. However, in the trucks

segment, its products sell at a 2-3% discount to other Indian player. Brand premium is

typically larger in passenger-focused segments (such as cars, 2Ws), whereas in trucks

there is not much of a difference in pricing between Indian players.

Figure 88: Ceat has seen ~800bps margin expansion in

last 3 years on benign RM and better mix

Figure 89: Share of non-trucks has increased from 33% to

52%

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Share of CVs Exports, 2Ws, PVs


Growth outlook: CEAT has grown ahead of the Indian tyre industry in the past few years

(growing in double digits). The company has attributed this to increasing focus on the 2W

and PV OEM segments where it had started working with several OEMs in the product

development phase. While margins in the OEM segment are quite low, this step has enabled

the company to increase its presence in the replacement segment too. The company had

done an internal study, based on which 30% of customers while replacing tyres blindly go for

the one fitted by the OEM in their vehicles. This has enabled the company to grow ahead of

the industry and also improve its product mix as the share of non-truck markets (2Ws, cars,

and exports) has increased from 33% in FY10 to 52% currently.

04 November 2014


Going forward, the company expects growth to pick up in all OEM segments. 2Ws and

PVs are already seeing good growth while CVs should follow suit. The replacement

industry growth had also slowed to low single digit in the downturn; the company has not

yet observed any major pick up on the replacement side yet.

Margin levers: Not only did CEAT lag other Indian player in terms of size, its profitability

was much lower a few years back. Hence, the company took steps to improve margins like

correcting mix, which combined with RM benefit led to margins increasing from ~4.5% in

FY11 to ~12% in FY14. According to the company, margins in PVs/2Ws are 400-500 bp

higher than those of CVs. In trucks, it still has higher margins in bias than radials (unlike

JK Tyres and Apollo Tyres), which probably is on account of CEAT's lower positioning in

the truck radial segment.

Rubber is the main raw material, constituting ~50% of the raw material while the rest

~50% is crude-linked derivatives and others. Steep decline in rubber prices in the past two

years has led to improvement in margins for all tyre companies. Rubber prices continue to

remain benign and crude prices have also started softening, so companies can see further

raw material benefit going forward. The company is currently operating at ~85% blended

utilisation—80% in trucks and nearly 100% in 2Ws. It is expanding capacity in both cars

and 2Ws—setting up a new 120 MT plant for each of these.

Other points to note: The company is looking at entering off-highway tyres (OHT tyres)

for exports where Balkrishna industries limited (BKT) is the current market leader. Given

the large capacity of truck bias will become redundant with the radialisation trend in the

country, it is converting some of this into speciality tyres (100 MT) while the rest will be

shut down. Given the new capacities coming on stream, it shouldn't impact top line much

as per the company.

Figure 90: Ceat Ltd. historical financials

Ceat FY09 FY10 FY11 FY12 FY13 FY14

Net Sales 23,772 28,153 34,856 44,694 48,710 53,412

Growth YoY (%) 2% 18% 24% 28% 9% 10%

EBITDA 395 3,157 1,411 2,511 4,204 6,332

EBITDA margins (%) 1.7% 11.2% 4.0% 5.6% 8.6% 11.9%

PAT -161 1,610 223 75 1,064 2,538

Growth YoY (%) -111% -1100% -86% -66% 1310% 139%

ROE (%) -3% 26% 3% 1% 14% 26%


04 November 2014


Minda Industries Ltd. (Not Rated)

About the company: Minda Industries is the flagship company of the NK Minda group

engaged in the manufacturing electrical and electronic auto components for the auto

industry. The company's operations can be divided into four segments:

1. Switches: This division contributes 45% to its total revenue, with sales being

primarily to 2W and 3W OEM space. Within this division 75-80% of sales are to

OEMs where Minda has a 60% market share. 15% of the revenue comes from

replacement sales. The replacement cycle for switches is around 5-6 years.

Exports contribute 6% of sales currently, primarily to the US and Europe. The

group has a subsidiary in Vietnam which is engaged in supplying to the ASEAN

region. Its key OEM clients in this division include all the top two-wheeler

companies such as TVS (33%), Bajaj (29%), and Hero.

2. Lighting: This division contributes to 18% of revenues where sales are to 2W,

3W, PV and tractors segments. Within this division ~65% of sales are to OEMs

where Minda has a ~15% market share. 25% of revenues come from replacement

sales whereas exports contribute to 10% of lighting sales primarily to Italy,

Indonesia, France, Japan, etc. The replacement cycle for Lighting is around 4

years. Its key OEM clients here are Maruti (32%), Volkswagen (18%), Mahindra

(11%), TAFE, Toyota. Its key competitors here are Lumax, Fiem, IJL.

3. Horns: This division contributes to 22% of revenues where sales are to all auto

segments. Within this division, ~60% of sales come from its recent acquisition of a

Spanish company, Clarton Horns. The acquisition of Clarton has made Minda the

second-largest player globally in horns. Clarton Horns has a 33% share in the US

and the European market. Within the India business, only 45% of revenue comes

from OEMs, 35% from replacement, and 20% from exports to Italy, South Africa,

China and Thailand. Its key OEM clients here are Bajaj (26%), FIAMM (its JV

partner, 23%), Honda (11%), Ford (10%), and TVS (9%).

4. Others: This division contributing to 14% of revenues includes product lines such

as CNG/LPG kits, blow moulds, batteries, and fuel caps. The company has

recently entered into a JV with Panasonic for manufacturing batteries wherein

Minda will have a 40% stake. It is currently present only in the 2W aftermarket,

but going forward wants to enter the 2W OEM segment as well as the 4W

segment. It has entered into a 50% JV with Emer, Italy for CNG/LPG kits. It has a

76% JV with Kyoraku for blow-moulded products and a 50% JV with JBM for die-

casting products.

Competitive positioning: The company has a very strong competitive positioning on the

switches and horns business. In the switches business, it has a 60% market share with

OEMs in the Indian market. The acquisition of Clarton has given Minda a strong

positioning globally on horns, making it the No. 2 player globally. Across its product lines,

50% of the replacement segment revenues come from the unorganised segment. The

company is working hard on further strengthening the already strong Minda brand in the

replacement market by focusing on engagement with the mechanics which it believes are

the key decision makers when it comes to replacing products. Management believes with

rising income levels, consumers will gravitate towards branded auto components.

04 November 2014


Figure 91: Company has robust ~20% CAGR revenue

growth aided by Clarton acquisition though margins have

fallen

Figure 92: Company has a diversified product mix

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Margin levers: According to management, the company suffered a Rs100 mn loss in the

switches division as it started a completely new facility at Hosur for HMSI. Going forward,

as the utilisation improves here, management expects that to help improve margins in the

switches division, up from the 8% levels in FY14 back to 11% margin which the company

has been enjoying in earlier years. On the lighting side too management believes that

once it is able to ramp up utilisation at some of its new facilities in Manesar and Pune,

from 60% utilisation to 80% utilisation, it will be able to improve margins from 6% in FY14

to 8-9% levels going forward. On the horns side, the focus will be on moving some part of

the business from Clarton Horns to India whereas management stated this could result in

a 15-20% improvement in contribution margins.

Figure 93: Minda Industries historical financials

Minda Industries FY09 FY10 FY11 FY12 FY13 FY14

Net Sales 4,552 6,255 9,540 11,780 13,382 17,031

Growth YoY (%) 13% 37% 53% 23% 14% 27%

EBITDA 596 733 837 787 956 786

EBITDA margins (%) 13.1% 11.7% 8.8% 6.7% 7.1% 4.6%

PAT 152 234 355 242 283 53

Growth YoY (%) -3% 54% 52% -32% 17% -81%

ROE (%) 20% 25% 23% 8% 9% 2%


04 November 2014


Sundram Fasteners (Not Rated)

About the company: Sundram Fasteners (SFL) is the largest fastener manufacturer in

India with a 40% market share in the domestic auto sector. It is part of the TVS group,

which apart from the flagship company TVS Motors has several ancillary companies as

well. Apart from high-tensile fasteners, SFL has also diversified into powder metal

components, cold extruded parts, hot forged components, radiator caps, automotive

pumps, gear shifters, gears and couplings, hubs and shafts, tappets and iron powder for

global players from its businesses in India, China, the UK, Germany and Malaysia. While

fasteners contribute ~40% to its standalone revenue, pump assemblies and engine

components which are made out of one plant constitute 30% of sales, powder metal parts

15%, and cold extrusions another 15% of its standalone revenue.

For the standalone entity, 60% of the revenue comes from domestic OEMs, 40% from

exports—where 80% of the revenue come from US-based OEMs. The 60% domestic

revenue is split into various segments: CVs (30% normally, 25% currently), PVs (20%),

2W (7%), and tractors (3-5%).

Competitive positioning: SFL is the largest player in fasteners and is a price setter in the

market. The company specialises in more complex fasteners and hence is able to set the

pricing in those, according to management; given its premium pricing, it has a lower share

in the less complex fasteners. The main competitors for the company are Lakshmi

Precision and Sterling Tools. The company has a slightly higher share in CVs than in other

segments.

As with other auto components in the country, there is a large unorganised segment in

fasteners as well, but that is largely for the less complex fasteners. Whilst there is no data

available on the same, management reckons >10% of the total fasteners market would be

unorganised. The replacement market is largely unorganised.

Figure 94: Topline in the last two years was impacted by

the CV slowdown

Figure 95: Company has biggest sales from exports (US

based OEMs) and Indian CVs

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Growth outlook: Given the decline in CV volumes in the past two years, SFL's India top

line has declined from Rs22 bn in FY12 to Rs20 bn in FY14. Going forward, with signs of

the CV industry volumes starting to recover, management expects top-line growth to come

back. The company has historically grown faster than the fastener industry by diversifying

into more products. Management says that process will continue as long as it doesn’t

enter any new product segment already done by any of the other TVS group companies.

04 November 2014


SFL's German subsidiary is its largest. Earlier the German business was split into three

categories: autos (CV, CE, off-road), distribution and construction, and wind energy. The

construction and wind energy segments have been severely impacted in the past few

years, resulting in losses in its German subsidiary. Since shutting down the business is

very expensive, management is continuing with operations despite losses. Management

does not see any near-term triggers for this to change, and said that China and UK

subsidiaries are doing well.

Margin levers: While the company is currently running at a decent capacity utilisation,

management highlighted that capacity utilisation is difficult to quantify. This is because

while it might be running its machines almost all the time, as volumes pick up it will be able

to do longer runs on the same components, enabling it to save time on frequent setup

changes, thus improving its efficiency and leverage. It highlighted that it was running at a

top line of Rs22 bn in FY12 and since then despite a capex of Rs2 bn its revenues have

come down to Rs20 bn; given an asset turnover of 1, the company is easily capable of

doing Rs24-25 bn.

Management also mentioned that it chooses to focus on ROCE over margins. It is

consistently targeting an ROCE of 15-20%. As an example, on large export orders, the

margins might be lower but if payment terms are good, then ROCEs are decent.

Figure 96: Sundram Fasteners historical financials

Sundram Fasteners FY09 FY10 FY11 FY12 FY13 FY14

Net Sales 17,911 16,881 22,763 27,616 26,430 27,286

Growth YoY (%) 11% -6% 35% 21% -4% 3%

EBITDA 1,957 1,431 2,555 3,063 2,669 2,899

EBITDA margins (%) 10.9% 8.5% 11.2% 11.1% 10.1% 10.6%

PAT 336 472 1,141 1,011 934 1,208

Growth YoY (%) -53% 40% 142% -11% -8% 29%

ROE (%) 7% 10% 21% 16% 13% 15%


04 November 2014


Rane Holdings Ltd. (Not Rated)

About the company: Rane Holdings Ltd. is the holding company of Rane Group. The

group has been in existence since late 1920s (earlier it was into trading of auto

components) and then started manufacturing in 1960. The group has ten different

companies. The major companies are:

1. Rane Madras (manual steering and suspension systems—24% of revenue):

caters to PVs, CVs, and tractors.

2. Rane TRW Steering (hydraulic pumps and steering—18% of revenue): caters to

PVs and CVs.

3. Rane NSK Steering (electric power steering—20% of revenue): largely PVs.

4. Rane Brake Linings (friction material components—15% of revenue)—caters to

PVs and CVs.

5. Rane Engine Valve (valve train components—14% of revenue): caters to PVs,

CVs, tractors, and 2Ws.

Other than Rane holdings, Rane Madras, Rane Brake and Rane Engine Valve are all

listed too. The group had a turnover of ~US500 mn in FY14. It had 70% exposure to the

OEM segment, 13% to replacements, and 17% to exports. Among the segments,

passenger vehicle is the dominant segment, constituting ~60% of its revenue, followed by

CVs at 25%, tractors at 7%, 2Ws at 3%, and non-autos the remaining 5%.

Competitive positioning: The company has a strong competitive positioning in hydraulic

steering where it has a 55% market share, and it is No. 2 in brake linings where it has a

37% market share. Steering is typically a high-end technology which is the reason for the

company being present in JVs with TRW automotive and NSK. Other segments of the

company are relatively less technology intensive but here too it has some tie-ups, such as

with Nisshinbo Brakes, Japan, for the brake linings business. According to the company,

the other important factors which lead to competitive positioning in the business are

strength of brand, quality, and having an efficient cost structure. Maruti is main customer

for the company, constituting ~20% of revenue, followed by M&M and Tata Motors at

~10% each.

Figure 97: Rane's topline has grown at ~23% CAGR with

margins in the ~11% range

Figure 98: The group has ten different companies with

bulk of revenues from steering systems

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Power steering18%

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04 November 2014


Growth outlook: The company is guiding for a ~20% CAGR in group revenues over the

next three years, from Rs27 bn in FY14 to Rs46 bn in FY17. Other than the normal

industry growth, this will come from market-share gains and new product entry. Among the

new products, one big thing could be air-bags which are manufactured at Rane TRW

Steering entity. If safety regulations in India regarding mandatory usage of air-bags in

vehicles were to come through, it could be a big growth driver, according to management.

Other things include strengthening its exports presence (the company is setting up new

warehouses in foreign locations) and also extending existing products to newer segments

(such as hydraulic steering to LCVs).

As for the near term, it is seeing signs of improvement in the auto sector. The PV industry

is clearly recovering with increase in schedules for the company, and it expects the

industry to grow at ~10% for the year. While the CV industry has not seen an improvement

on the ground, it too should return to positive growth soon, according to management.

Margin levers: The company has provided a breakdown of utilisations by vehicle

segment: it is operating at ~70% utilisation in PVs, 55% in CVs, and 85% in tractors and

2Ws. Imports form 17% of its sales. Imports are mainly of electronic steering, airbags, etc.

While at the group level, there is no FX exposure (given exports are also similar), at the

individual entity level there is varied exposure. Rane Madras and Rane engine are net

exporters while Rane brake and Rane TRW are net importers. All these companies hedge

at entity level, given that they are all separate.

Each group company has localisation and cost savings target of 1-2% every year. Steel

and aluminium are the major raw materials. Margins in the replacement segment are

higher by 2-3% than the OEM segment, so increasing the share of replacement (if CCI

clamps down on OEMs' contracts with suppliers regarding spares were to come through)

should aid both growth and profitability.

Figure 99: Rane holdings historical financials

Rane Holdings FY09 FY10 FY11 FY12 FY13 FY14

Net Sales 8,056 11,768 15,995 18,699 19,481 19,361

Growth YoY (%) 37% 46% 36% 17% 4% -1%

EBITDA 821 1,534 1,800 2,224 1,903 1,670

EBITDA margins (%) 10.2% 13.0% 11.3% 11.9% 9.8% 8.6%

PAT 153 542 940 1,014 489 450

Growth YoY (%) -75% 254% 73% 8% -52% -8%

ROE (%) 4% 11% 18% 17% 8% 7%


04 November 2014


Sundaram Clayton (Not Rated)

About the company: Sundaram Clayton is part of the TVS group which apart from the

flagship company TVS Motor has several companies in the auto ancillary space.

Sundaram Clayton is a large player in aluminium casting space, manufacturing

components such as gear housing, fly-wheel housing, and transmission parts. It has four

manufacturing plants all located in South India. It is also the holding company of TVS

Motors with a 57% stake; the stock currently derives bulk of its value from this stake only.

The company gets a sizeable ~45% of its revenues from exports. Within various product

segments, it gets 50% of revenue from CVs, 20% from two-wheelers, and 30% from

passenger vehicles. Most of the exports largely cater to CVs, while the Indian business'

revenue comes primarily from 2Ws and passenger vehicles.

Competitive positioning: In the domestic market the main customers of the company are

TVS Motors in 2Ws, and Hyundai and Ford in passenger cars—all these OEMs have

plants in South India only. In exports, its main customers are Volvo and Cummins. The

company has also started supplying to Daimler trucks in India and there is an opportunity

to get more business from Daimler globally, given that it is a big truck player outside India.

Globally there is greater demand for aluminium components as companies downsize their

vehicles to comply with the emission norms; hence, there is a shift from steel components

to aluminium components. So it expects content per vehicle to also increase.

According to the company, die development and manufacturing take time and suppliers

typically work with OEMs in the development process, so relationships are sticky and they

become preferred suppliers. They also have competency in developing complicated and

integrated castings which are high technology intensive which is a key barrier to entry. On

the exports front, labour cost is a key advantage which has resulted in the company

increasing its export presence over the years, according to management.

Figure 100: Company has had ~20% revenue CAGR with

margins averaging ~10%

Figure 101: Company largely has exposure to Europe

CV's, 2W sales are largely to TVS Motors

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Growth outlook: The company's key area of focus is increasing presence in HCVs in the

country. Currently, commercial vehicles in the country largely use iron castings but there

should be shift towards aluminium castings. While aluminium castings have ~20% higher

upfront cost, total cost of ownership is lower because of parameters such as higher fuel

efficiency of vehicle on lower weight. The company is looking at positive growth

momentum for the India OEM space, although there might be a slight downward trend in

European CVs. It hopes to counter this by increasing the content per vehicle.

04 November 2014


Margin levers: It is currently operating at ~80% capacity utilisation. Management said,

working capital is slightly higher in its business which drags down ratios such as asset

turns, and ROA. It is guiding for a Rs1 mn capex spend for the year.

Figure 102: Sundaram Clayton historical financials

Sundaram Clayton FY09 FY10 FY11 FY12 FY13 FY14

Net Sales 5,164 5,187 8,048 10,160 10,176 11,924

Growth YoY (%) 15% 0% 55% 26% 0% 17%

EBITDA 477 525 877 1,084 918 1,085

EBITDA margins (%) 9.2% 10.1% 10.9% 10.7% 9.0% 9.1%

PAT 69 116 380 689 354 537

Growth YoY (%) -73% 69% 227% 81% -49% 51%

ROE (%) 3% 5% 15% 24% 12% 16%


04 November 2014


Asahi India Glass (Not Rated)

About the company: Asahi India Glass (AIG) promoted jointly by Asahi Glass, Japan and

Labroo family was originally set up as a vendor to Maruti (which still has ~11% stake in

company). It is India’s largest manufacturer of automotive glass with over 70% market

share and supplies to all the leading OEMs in the country. With the merger of Floatglass

India, AIG also has about a 25% share of the Indian float glass market.

Its business contains three verticals: automotive (which constitutes 49% of revenues),

architectural float (which constitutes 46% of revenues) and others like consumer glass,

solar glass being remaining ~5% of revenues. The company has 8 manufacturing

locations spread across the country. Within autos, it largely gets revenues from the Indian

passenger vehicles OEM segment though company has plans to increase presence in

replacement and exports, and also in CVs and tractors.

Competitive positioning: Company enjoys clear market leadership in the automotive

glass segment. It used to be the sole player to most of the passenger car industry around

a decade back with ~90% share. While its market-share has come down over the years, it

still has dominant 70% share and caters to bulk of business of major Indian PV players like

Maruti, Hyundai, M&M etc. The architectural glass segment is more competitive. Company

has total installed glass capacity of 1,200 metric tons per day (which is second largest in

India after Saint Gobain) and has a network of over 1000 distributors.

Figure 103: Asahi's profitability has been deeply impacted

in the slowdown with company turning loss making in the

last two years

Figure 104: Company has equal exposure to autos

(largely PVs) and non-autos

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Growth outlook: Given the OEM weakness, the automotive segment witnessed low

single digit growth CAGR over FY12-14. Company expects rebound to double digit growth

driven by revival in domestic auto markets, continuous introduction of new models and

also price hike it has recently taken. Company is also making inroads into the CV segment

and has recently also forayed into the tractor segment.

The architectural segment which was also impacted due to dismal demand, is now

showing signs of uptick on back of improvement in economic sentiment. As per the

company, this segment has huge growth potential – global average demand for using

sophisticated glass is much high as compared to India. Value added glass has now started

gaining popularity in residential buildings apart from retail and commercial asset classes.

The float glass industry is also much more fragmented.

04 November 2014


Margin levers: Margins were deeply impacted in the last two years as company's EBITDA

margins fell from ~18% to ~12% levels on rise in energy costs and raw material costs

(soda ash etc). Glass manufacturing industry is comparatively more capital intensive

hence there is higher operating leverage in the business, while capex should remain low

for next 1-2 years. Company has also recently stopped production of float glass at the

Taloja plant and is taking necessary steps to close the plant given the low utilizations and

also the fact that the plant was aging. High interest cost on account of debt meant that

company reported a loss in both FY13 and FY14.

Figure 105: Asahi India historical financials

Asahi FY09 FY10 FY11 FY12 FY13 FY14

Net Sales 12,446 12,906 15,532 16,739 19,367 21,341

Growth YoY (%) 25% 4% 20% 8% 16% 10%

EBITDA 1,851 2,316 2,641 1,941 1,848 2,836

EBITDA margins (%) 14.9% 17.9% 17.0% 11.6% 9.5% 13.3%

PAT -431 14 169 -668 -989 -497

Growth YoY (%) -657% -103% 1122% -496% 48% -50%

ROE (%) -22% 1% 8% -48% -113% -21%


Mahindra CIE (Not Rated)

About the company: Mahindra CIE was formed with the amalgamation of Mahindra

Systech (forgings, stampings, castings, magnetic and gears) and CIE Forgings Europe.

M&M holds a ~20% stake in the entity while CIE holds a ~53% stake. Domestic India

operations already constituted less than half of M&M Systech's revenues as it had made

various acquisitions in Europe during the 2006-08 period (Stokes; Jeco in 2006 and

Schoneweiss in 2007), which had resulted in high leverage. Nevertheless, as per company

it went for this CIE merger as both had complementary product portfolios—while M&M

Forgings largely catered to CVs, CIE addressed car markets.

According to management, with a combined revenue of Rs55 bn (of which forging is

~Rs40 bn), Mahindra CIE has become one of the biggest forging companies globally. The

entity has bulk of the exposure to Europe (50%), followed by the Americas region (35%),

and Asia (15%). The passengers vehicles segment is the largest, contributing ~48% to

revenue (both the Indian business of Mahindra Systech and CIE Europe have the largest

exposure to passenger vehicles), followed by commercial vehicles at 42% (Mahindra

Forgings Europe primarily caters to CVs), and remainder ~10% being other segments

(non-autos, tractors, etc).

Competitive positioning: Mahindra CIE is very strong in crankshafts, both in India and

Europe. In India, it has over ~40% market share in passenger vehicles, while in Europe it

has ~25% share in passenger cars, and 10-15% share in CVs. According to the company,

given that these products (such as crankshafts) are quite complicated, suppliers have to

work with the OEMs in the development stage; hence, it is not easy to gain/lose share

unless there is a new platform or a change in model. Typically, in CVs, these changes are

relatively less. Key clients for the standalone operations are M&M (which constitutes 45%

of M&M Systech's India business), Tata Motors and Maruti. For M&M forgings Europe, the

big customers are European truck makers Daimler, and Scania; and for CIE, the biggest

customer is Volkswagen.

Growth outlook: The company expects the Indian passenger vehicles markets to grow by

~10% for the year, the European car market by mid-single digit, while the European CV

volumes should remain stable on a sequential basis. The outlook for the European CV

industry has been cut of late, but the company is not overly concerned about it as long as

there is not a big decline. With the transition to Euro VI, there has been a slight increase in

content per vehicle. From the CIE deal, it is looking to accelerate Indian revenue as CIE

brings new products to India (rail forge, etc), and also use India to export some of its

04 November 2014


products. It will also help bring European OEMs' (Volkswagen, Renault, etc) Indian

operations business to M&M Sytech India, since these OEMs already have well developed

relationships with CIE in Europe.

Margin levers: Management believes margin improvement is the key focus area for the

company, particularly in M&M Systech's European business. The company had gone for

all these acquisitions in Europe in order to acquire technology and also an international

customer base. However, it was caught on the wrong side of the cycle as the Global

Financial Crisis set in. Moreover, with the quick recovery post the crisis, it was again

impacted as the company had made deep cuts of skilled workforce (in the downcycle),

which was difficult to bring back with additional pressures from OEMs to develop Euro VI-

compliant products. European business margins had declined to low single digits; so the

company was finding difficult to turn around. This was one of the reasons for the CIE deal,

because, as per management, CIE has greater execution ability. CIE already has the

experience of turning around various companies in Europe, and post this deal, it brought in

its own experts at the top management.

Other than the improvement in capacity utilisation (75% utilisation in India and 65% in

Europe) which is contingent on the demand environment, the company is looking at the

following factors to improve margins: (1) price correction in select markets where margins

are low, (2) a cut in temporary staff, (3) outsourcing of low value-added works such as

finishing, (4) increasing the efficiency of plants by reducing cycle times, and increasing die

life, and (5) €5 mn of annual fuel subsidy to be received from the German government.

Hence, management expects a sizeable improvement in margins in M&M Systech Europe,

a small improvement in M&M Systech India (from improving utilisations), while CIE's

margins should remain constant.

Other points to note: The company has set targets for itself to achieve EBIT of >9%,

debt/EBITDA of <2, FCF/EBITDA of >50% and RONA of >20%. We note that M&M

forgings historical financials are no longer relevant with the merger of CIE and M&M

Systech.

04 November 2014


Companies Mentioned (Price as of 03-Nov-2014)

AIS (AISG.NS, Rs125.0) Amara Raja (AMAR.BO, Rs643.8) Apollo Tyres (APLO.BO, Rs229.85, OUTPERFORM, TP Rs266.0) Ashok Leyland Ltd (ASOK.BO, Rs46.5, NEUTRAL, TP Rs48.0) Bajaj Auto Limited (BAJA.BO, Rs2574.05) Balkrishna Indus (BLKI.NS, Rs803.4) Bharat Forge Limited (BFRG.BO, Rs811.8, NEUTRAL, TP Rs830.0) Bosch Limited (BOSH.BO, Rs15502.15) Bridgestone (5108.T, ¥3,652) Ceat Ltd (CEAT.BO, Rs868.85) Cummins Inc. (CMI.N, $145.89) Daimler (DAIGn.DE, €61.76) Eicher Motors (EICH.BO, Rs12721.2) Exide Industries (EXID.BO, Rs159.9) Fiem Industries (FIIN.NS, Rs700.7) Ford Motor Company (F.N, $13.96) Gabriel India (GABR.NS, Rs83.45) Hero Motocorp Ltd (HROM.BO, Rs3010.75) Honda Motor (7267.T, ¥3,479) Hyundai Motor (005380.KS, W160,000) JAI (JMNA.NS, Rs132.8) JK Tyre & Ind (JKIN.NS, Rs498.2) JTEKT (6473.T, ¥1,731) MRF (MRF.BO, Rs31825.9) Mahindra & Mahindra (MAHM.BO, Rs1268.55) Mahindra CIE (MAHN.NS, Rs218.7) Maruti Suzuki India Ltd (MRTI.BO, Rs3285.6) Michelin (MICP.PA, €68.98) Minda Industries (MNDA.NS, Rs543.5) Motherson Sumi Systems Limited (MOSS.BO, Rs426.45) Nissan Motor (7201.T, ¥998) Rane (RANE.BO, Rs565.5) Renault (RENA.PA, €58.85) SKSSL (SONA.BO, Rs61.45) Sundaram Clayton (SUND.NS, Rs1640.75) Sundram Fasten (SNFS.NS, Rs158.7) Suprajit Engr (SUPE.BO, Rs121.45) TRW Automotive Holdings Corp. (TRW.N, $101.42) TVS Motor (TVSM.BO, Rs261.9) Tata Motors Ltd. (TAMO.BO, Rs531.15) Volkswagen (VOWG_p.F, €170.5) Wabco India Ltd. (WABC.BO, Rs3584.1, OUTPERFORM, TP Rs4820.0)

Disclosure Appendix

Important Global Disclosures

I, Jatin Chawla, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Apollo Tyres (APLO.BO)

APLO.BO Closing Price Target Price

Date (Rs) (Rs) Rating

07-Jun-12 83.35 77.00 U *

02-Nov-12 86.45 85.00

13-May-13 90.05 89.00

06-Jan-14 105.95 131.00 O

12-Feb-14 118.40 144.00

15-May-14 177.30 190.00

10-Jun-14 203.10 233.00

* Asterisk signifies initiation or assumption of coverage.

U N D ERPERFO RM

O U T PERFO RM

04 November 2014


3-Year Price and Rating History for Ashok Leyland Ltd (ASOK.BO)

ASOK.BO Closing Price Target Price


29-Feb-12 28.30 35.00 O *

25-Jul-12 22.55 30.00

03-Apr-13 22.30 25.00 N

13-May-13 22.10 24.00

17-Jul-13 16.10 17.00

07-Nov-13 16.80 15.00

19-May-14 29.10 32.00 O

26-May-14 31.90 37.00

28-Jul-14 32.75 39.00

11-Sep-14 41.90 48.00


O U T PERFO RM

N EU T RA L

3-Year Price and Rating History for Bharat Forge Limited (BFRG.BO)

BFRG.BO Closing Price Target Price


07-Jul-14 667.75 690.00 N *

30-Jul-14 720.50 730.00


N EU T RA L

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals t he less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as w ell as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Austral ian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

04 November 2014


Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 46% (54% banking clients)

Neutral/Hold* 39% (51% banking clients)

Underperform/Sell* 13% (43% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Bharat Forge Limited (BFRG.BO)

Method: We value stock at 20x Sep-16 earnings (~10% premium to historic average given the structural shift in company's model) to arrive at our target price of Rs830 for Bharat Forge Limited.

Risk: The key downside risks to our Rs830 target price for Bharat Forge Limited include a slower-than-expected recovery in global auto volumes and industrial segment; inability to scale-up in the non-autos business as per expectations, increase in steel prices which is the main raw material. Upside risks include much faster than expected growth in non-autos (considering the massive opportunity size)

Price Target: (12 months) for Ashok Leyland Ltd (ASOK.BO)

Method: Our target price of Rs 48 for Ashok Leyland is based on P/E, we value the stock at 13x Jun-16E earnings (inline with 5 year average) and we give a Rs5/share value for the unlisted subs.

Risk: Key downside risks to our target price of Rs 48 for Ashok Leyland is a slower than expected recovery in the economy. We are expecting a strong Central Govt to take steps to revive the economy in the next two years. Ashok Leyland's earnings will be impacted greatly as stock has high financial and operating leverage

Price Target: (12 months) for Wabco India Ltd. (WABC.BO)

Method: We value Wabco India Ltd. at a target price of Rs4,820 using a DCF (discounted cash flow) methodology. We assume a 8% CAGR in content per vehicle and 8-10% growth in domestic CV volumes driving 16-18% growth in domestic revenue for the company. We assume a risk-free rate of 8% for the Indian market and 15% as the market return which gives us a cost of equity of 12.5%.

Risk: Risks that could impede achievement of our Rs4,820 target price for Wabco India Ltd. include: a slower-than-expected recovery in the CV cycle which would put pressure on both volumes as well as content per vehicle. Knorr so far has been a weak second player in the market; if Knorr is able to scale up faster than expected, that too will have a significant negative impact on WABCO

Price Target: (12 months) for Apollo Tyres (APLO.BO)

Method: Our target price of Rs266 for Apollo Tyres is based on an enterprise value (EV) of 5.5x Sep-16E EBITDA (earnings before interest, tax, depreciation and amortisation), in line with global peers.

Risk: Risks that could impede achievement of our target price of Rs266 for Apollo Tyres include: a sharp increase in rubber prices leading to a decline in margins for the company, and a high penalty for pulling out of the Cooper deal.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

04 November 2014


The subject company (APLO.BO, TRW.N, MAHM.BO, 7267.T, F.N, TAMO.BO, MOSS.BO, HROM.BO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (7267.T, F.N, TAMO.BO) within the past 12 months.

Credit Suisse provided non-investment banking services to the subject company (F.N) within the past 12 months

Credit Suisse has managed or co-managed a public offering of securities for the subject company (7267.T, F.N, TAMO.BO) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (7267.T, F.N, TAMO.BO) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (APLO.BO, TRW.N, MAHM.BO, 7267.T, MRTI.BO, 5108.T, CMI.N, F.N, TAMO.BO, 7201.T, MOSS.BO, HROM.BO) within the next 3 months.

Credit Suisse has received compensation for products and services other than investment banking services from the subject company (F.N) within the past 12 months

As of the date of this report, Credit Suisse makes a market in the following subject companies (TRW.N, 7267.T, CMI.N, F.N, 7201.T).

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For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (BFRG.BO, ASOK.BO, WABC.BO, APLO.BO, TRW.N, MAHM.BO, 7267.T, MRTI.BO, 005380.KS, RENA.PA, 5108.T, CMI.N, EXID.BO, F.N, BAJA.BO, TAMO.BO, EICH.BO, 7201.T, MOSS.BO, DAIGn.DE, 6473.T, MICP.PA, HROM.BO) within the past 12 months

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The following disclosed European company/ies have estimates that comply with IFRS: (RENA.PA, F.N, 7201.T, DAIGn.DE, MICP.PA).

Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (7267.T, 005380.KS, F.N, TAMO.BO) within the past 3 years.

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Credit Suisse Securities (India) Private Limited ...................................................................................................... Jatin Chawla ; Akshay Saxena

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04 November 2014


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20.0% India Auto Components Sector - Credit Suisse