Banco Prod­ucts (In­dia) Ltd: Solid fun­da­men­tals

Money Times - - Stock Pick -

(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.

Key Pos­i­tives:

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.

Con­cerns:

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.

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