Rico Auto In­dus­tries Ltd: Ex­pan­sion to drive growth

Money Times - - Expert Eye - By Vi­hari

(BSE Code: 520008) (CMP: Rs.64.90) (FV: Re.1)

The stock is be­ing ac­cu­mu­lated by dis­cern­ing in­vestors as the auto com­po­nent ma­jor is ex­pected to do well in com­ing quar­ters based on its ex­pan­sion and other ini­tia­tives.

In­cor­po­rated in 1983, Rico Auto In­dus­tries Ltd (RAIL) is an in­te­grated auto com­po­nents man­u­fac­turer present in the value chain from ‘De­sign to De­liv­ery’. It man­u­fac­tures and sup­plies alu­minium and fer­rous ma­chined com­po­nents and as­sem­blies to orig­i­nal equip­ment man­u­fac­tur­ers (OEMs) and Tier-1 cus­tomers across the globe. The Com­pany is pro­moted and headed by Mr. Arvin­dKa­pur.

RAIL is a pre­ferred sup­plier of auto com­po­nents with world-class high pre­ci­sion and fully ma­chined com­po­nents and as­sem­blies. It is ISO TS 16949, ISO 14001 and OHSAS 18001 cer­ti­fied. Its ex­ports con­sti­tute 25% of sales. In Septem­ber 2014, RAIL di­vested 50% stake in the JV firm, FCC Rico to its Ja­panese part­ner FCC Co for Rs.495 crore, which changed its for­tune. The funds were utilised to re­pay debts and other li­a­bil­i­ties, which re­duced the in­ter­est cost and paved the way for ex­pan­sion. The Com­pany set up joint ven­tures with play­ers like Magna Pow­er­train (for oil and wa­ter pump sys­tems) and Jin­fei (for al­loy wheels). It has 5 sub­sidiaries and 3 step-down sub­sidiaries. Rico Auto In­dus­tries Inc., USA and Rico Auto In­dus­tries, UK, are en­gaged in trad­ing, ware­hous­ing and lo­gis­tics. An­other sub­sidiary - AAN was set up to fo­cus on the busi­ness of non-au­to­mo­tive com­po­nents es­pe­cially for man­u­fac­tur­ing and sup­ply­ing tech­ni­cal and en­gi­neer­ing equip­ment re­quired for De­fence - Army, Aero­space, Navy and Home­land Se­cu­rity. Rasa Au­to­com Ltd (RAL) man­u­fac­tures high pres­sure and grav­ity die cast, in which RAIL holds 92.5% stake. Rico Jin­fei Wheels Ltd (RJWL) man­u­fac­tures alu­minium al­loy wheels for two-wheel­ers. RAIL’s Haryana plant was set up for high ton­nage, high pres­sure die cast­ing work with full au­toma­tion and con­trols and high pre­ci­sion ma­chin­ing for auto parts and as­sem­bly. The Com­pany is now geared up for higher vol­umes for its mar­quee clients like BMW, Re­nault, GKN, Ea­ton and Tata Mo­tors.

RAIL com­menced com­mer­cial pro­duc­tion at its Rs.52 crore green­field plant at Chen­nai from April 2016 to sup­ply auto com­po­nents to Re­nault – Nis­san. In Phase-I, it in­stalled a ca­pac­ity of 1,50,000 sets p.a. for mak­ing en­gine parts in­clud­ing cylin­der blocks. The Com­pany is also look­ing for ex­port op­por­tu­ni­ties to be catered by this plant. It ex­pects sales of ~Rs.100 crore from this plant by FY18.

Fur­ther, RAIL laid the foun­da­tion stone for its new Rs.135 crore man­u­fac­tur­ing plant at Pathredi, Bhi­wadi (Ra­jasthan), in July 2016 for the man­u­fac­ture of auto com­po­nents. This fac­tory is be­ing built on a plot of 11.3 acres with the im­ple­men­ta­tion of the lat­est man­u­fac­tur­ing tech­nol­ogy. The plant is likely to start com­mer­cial pro­duc­tion in FY18 and is ex­pected to

gen­er­ate a turnover of ~Rs.315-330 crore at full pro­duc­tion by FY19. Fur­ther, Hero Mo­to­corp has made new launches, which are do­ing very well and RAIL’s con­tri­bu­tion to their scooter com­po­nents is ex­pected to rise. RAIL sup­plies com­po­nents to Tata Mo­tors for its Nano car from it Gur­gaon plant due to the low de­mand. It is in talks with Tata Mo­tors to restart its Sanand (Gu­jarat) plant for man­u­fac­tur­ing com­po­nents for their new mod­els. Fur­ther, dis­cus­sions are in progress with Hero Mo­to­corp and Maruti Suzuki for sup­plies to their up­com­ing plants in Gu­jarat and other states.

For FY17, RAIL’s net profit soared 64% to Rs.48.2 crore on 7% higher sales of Rs.1079.2 crore fetch­ing an EPS of Rs.3.6 and a div­i­dend of 75% was de­clared. Dur­ing Q4FY17, net profit de­clined 9% to Rs.6.4 crore on 9% higher sales of Rs.274.7 crore fetch­ing an EPS of Re.0.48.

With an eq­uity cap­i­tal of Rs.13.5 crore and re­serves of Rs.488.9 crore, RAIL’s share book value works out to Rs.36. The pro­mot­ers hold 50.1% of the eq­uity cap­i­tal, FIIs hold 2.3%, DIs hold 5.9% and PCBs hold 4.8%, which leaves 36.9% stake with the in­vest­ing pub­lic. The value of its to­tal gross block is Rs.1092 crore (in­clud­ing cap­i­tal work-in-progress of Rs.45 crore), which is higher by Rs.217 crore com­pared to the to­tal cap­i­tal em­ployed of Rs.875 crore. With net debts of Rs.64 crore, the net DER works out to just 0.12:1.

The In­dian auto in­dus­try ac­counts for 7.1% of the coun­try's GDP. It is one of the largest in­dus­tries in the world led by the two-wheeler seg­ment with 81% mar­ket share ow­ing to the grow­ing mid­dle-class and young pop­u­la­tion. More­over, the ris­ing in­ter­est of com­pa­nies in ex­plor­ing the ru­ral mar­kets fur­ther boosted the growth of this sec­tor. The over­all Pas­sen­ger Ve­hi­cle (PV) seg­ment has 13% mar­ket share.

At $38 bil­lion, In­dia’s auto com­po­nents in­dus­try is just 5% of the $800 bil­lion global mar­ket. Ac­cord­ing to Au­to­mo­tive Com­po­nent Man­u­fac­tures As­so­ci­a­tion (ACMA), the in­dus­try’s turnover is pro­jected to touch $115 bil­lion by 2020-21. The in­dus­try is es­ti­mated to grow at 14% CAGR dur­ing 2013-21. Ex­ports, which were at $10.8 bil­lion in FY16, are pro­jected to touch $80 bil­lion by FY26, up from $40 bil­lion by FY20. Ac­cord­ing to ICRA, the In­dian auto com­po­nents in­dus­try is ex­pected to grow by 8-10% in FY18, based on higher lo­cal­i­sa­tion by OEMs, higher com­po­nent con­tent per ve­hi­cle and ris­ing ex­ports from In­dia. The Au­to­mo­tive Mission Plan 2016-26, pub­lished in Septem­ber 2015, en­vi­sions a four­fold jump in auto com­po­nent out­put in ten years, to ~Rs.19 lakh crore ($274 bil­lion).

RAIL ex­pects rev­enue and ex­ports to grow 15% in FY17 on the back of im­prove­ment in the busi­ness sce­nario and strate­gic ex­pan­sion. Based on the cur­rent go­ing and capex, the Com­pany is ex­pected to post an EPS of Rs.5.5 in FY18 and Rs.7.5 in FY19. At the CMP of Rs.64.90, the stock trades at a for­ward P/E of 11.80x on FY18E and 8.6x on FY19E earn­ings re­spec­tively. The stock has the po­ten­tial to touch Rs.105, at which it is ex­pected to trade at a P/E of 14x on FY19E earn­ings. The stock’s 52-week high/low is Rs.75.25/40.35.

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