Banco Products (India) Ltd: Solid fundamentals
(BSE Code: 500039) (CMP: Rs.205.95) (FV: Rs.2) By Laxmikant Bhole
Although the geo-political tension between USA and North Korea is easing out, another event i.e. US President Donald Trump dissolving the business council last week hit the global markets dragging them lower. It also impacted the Indian markets making them more volatile. The market is swinging like a pendulum and sharp corrections and recoveries are seen quite often. However, I still feel that while a cautious stance can be taken in the near-term, the markets are bullish in the long-term as the Indian economy is strengthening each day. Investors must have observed that every market decline is followed by a smart recovery. This time, I present to you a mid-cap story on Banco Products (India) Ltd (Banco), which according to me, is a sound investment idea for the long-term.
Company Overview: Baroda-based Banco is an auto ancillary company with over five decades of experience. It is an original equipment manufacturer (OEM) that manufactures engine cooling (radiators, coolers, etc.) and sealing systems (various types of gaskets, rubber products, etc.) both for automotive and industrial applications. It also provides after sales service. Its product portfolio includes custom designed heat exchangers, fuel coolers, oil coolers and condensers, charge air coolers (CAC), rubber pre-coated beaded gaskets, rubber cork gaskets, aluminum edge moulded gaskets, copper gaskets, etc. These products are very critical for internal combustion engines mainly for automobiles, commercial vehicles, agricultural, power generation, rail, earth moving and industrial applications. Banco is one of the largest organized players in the radiator and gasket business with a strong presence in domestic as well as overseas markets. Its clientele includes big industry giants such as Maruti, Tata, Hero Honda, TVS, Ashok Leyland, M&M, Indian Railways, Eicher, John-Deere, Force Motors, Cummins, Godrej, Harley-Davidson, VST Tillers, Volvo, Mistubishi, JCB, etc. Its plants are located at Vadodara and Waghodia SEZ in Gujarat, Jamshedpur in Jharkhand, Rudrapur in Uttarakhand and Zaheerabad in Telengana. Its 100% EOU (export-oriented unit) is in Baroda and its major export market is the EU region. OEM sales account for 80-85% of its total revenue while the balance is derived from after sales service. Industry Outlook: Post demonetisation last year, the government is again focused on speeding up the overall infra and construction activities to boost the growth rate of the country's GDP and improve overall job creation and industrial activities. GST is a reality now and in the long run, it will be a game-changer for the overall industrial activity including the auto ancillary space. These catalysts will boost the demand for automotive and industrial related products in coming months, which in turn will benefit Banco as well.
Financial Performance: Banco exhibits strong financial parameters. Its equity capital of Rs.14.3 crore is backed by huge consolidated reserves of Rs.720 crore (50x its equity). The company is debt-free.
At the CMP of Rs.205.95, the stock trades at a comfortable P/BV of 1.89x. Its EV (enterprise value) stands at Rs.1564 crore, market cap at Rs.1472.93 crore and sales at Rs.1277 crore. So, the EV/market cap ratio works out to just above 1x,
which is attractive. NPM has been consistent over 7% and RoNW and RoCE were comfortable at 18% and 23% respectively in FY16 and are expected to improve further going forward. The company has rewarded its shareholders with good dividend yield over the last 15 years.
1. Trusted brand in the Indian automotive sector with five decades of experience; 2. Fully end-to-end integrated in the value chain; 3. Focused on innovation to create value-added differentiation for customers.
1. Intensifying global competition;
2. Volatile metal prices and fluctuations in foreign exchange.
Conclusion: The Indian automotive industry is growing steadily and the auto components sector has recorded robust growth in the past few years. Auto-component industries account for 25.6% of the total Indian manufacturing activity and 2.2% of the country’s GDP. GST has a positive impact on the auto components industry, which will boost domestic auto sales as well.
Over the last few years, Banco has invested heavily making its production systems more efficient and dynamic, which will benefit it in coming years. Buoyed by strong domestic demand for automobiles in the festive season ahead and strong brand value of Banco, long-term investors must keep this stock on the radar and accumulate on declines.