Rico Auto Industries Ltd: Expansion to drive growth
(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.