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Setco Auto | Q2FY17 Concall Key Take Aways




November 16, 2016 | PM Securities






Our take:

In our opinion the current slowdown was much envisaged and in the current quarter we shall definitely see some impact of demonetisation on OEM Sales, although better seasonal sales of new vehicles and setco’s aftermarket sales shall support it in the rough times.

FY18 shall be a year of reforms for setco on account of LCV, Tractor clutches and Lava cast sales initiating which shall contribute ~ Rs.1000mn to 1500mn to the top-line cumulatively. furthermore GST and government spends on infra shall organically drive sales of commercial vehicles and higher cost benefits in raw-mat on account of lava cast shall expand operating margins of setco by 1.5% to 2% and shall culminate in a good growth in PAT. Managements vision of Rs.10000mn top-line (Rs.5636mn as of FY16) by FY19 seems quite achievable if worked upon aggressively. 

  1. As per our expectations Setco Automotive reported a marginal drop in y-o-y top-line from Rs. 110.32 mn in Q2FY16 to 102.69 mn in Q2FY17, on account of subdued export demand due to global slow down and M&HCV production and sales de-growth in the reported quarter caused by procrastination of domestic M&HCV buying in anticipation of price reduction on account of GST rate expectation on autos to be 18%.

  2. Revised expectations of 28% GST rates has revived both production and sales and Q3 is showing good demand traction.

  3. EBITDA margins expanded by 1.5% from 10.9% in Q2FY16 to 12.4% in Q2FY17 due to raw-mat benefits post adjustments for forex loss of 16mn in Q2FY17 against a loss of 0.3mn in Q2FY16. Momentarily PBT & PAT margins are suffering on account of heavy finance costs due to debt raised in anticipation of over estimation of demand in the current financial year. PAT for Q2FY17 stood at Rs.12mn against Rs. 60mn y-o-y.

  4. Further contracts for supply to Ashok Leyland have been finalised and shall add Rs. 400mn to 500mn to the annual top-line.

  5. Lava cast currently operating at 30% capacity utilisation shall touch 60% by Q1FY18 and has a revenue visibility of about 400mn to 600mn for FY18.

  6. OEM supply for LCV Clutches has started for Tata ACE, and has a revenue visibility of Rs. 200mn for the next financial year. Besides 4 more OEM customers that currently source M&HCV clutches from setco are expected to start procuring LCV clutches aswell, in the next financial year.

  7. Over 50% of product range of tractor clutches has been developed and is being tested at different levels, by the end of FY18 setco is forecasting 25-30% market share in tractor clutches and potentially 3 lakh tractors out of 5 lakh tractors produced in a year shall use setco clutches.

  8. 2nd half of the year being a seasonally better year for tractor and M&HCV sales and on account of good rabi crop due to adequate monsoon, Q3 & Q4 shall see reasonable demand traction. A yoy annual growth rate of 8-12% can be expected.

  9. Cost benefits due to sourcing of raw-mat from lava cast shall expand EBITDA margins by 1.5% to 2% in the FY18 going ahead an EBIDTA margin of 15% can be estimated conservatively.(13.1% for H1FY17)

  10. In the near future no additional capex is envisaged and hence debt shall reduce progressively thus relaxing the burden of finance costs gradually, although to meet the capital requirement of phase 2 of lava cast (Rs.100crs) equity dilution may take place within the next two years, although it cannot be quantified as of now.

  11. 1)  As per our expectations Setco Automotive reported a marginal drop in y-o-y top-line from Rs. 110.32 mn in Q2FY16 to 102.69 mn in Q2FY17, on account of subdued export demand due to global slow down and M&HCV production and sales de-growth in the reported quarter caused by procrastination of domestic M&HCV buying in anticipation of price reduction on account of GST rate expectation on autos to be 18%.

  12. 2)  Revised expectations of 28% GST rates has revived both production and sales and Q3 is showing good demand traction.

  13. 3)  EBITDA margins expanded by 1.5% from 10.9% in Q2FY16 to 12.4% in Q2FY17 due to raw-mat benefits post adjustments for forex loss of 16mn in Q2FY17 against a loss of 0.3mn in Q2FY16. Momentarily PBT & PAT margins are suffering on account of heavy finance costs due to debt raised in anticipation of over estimation of demand in the current financial year. PAT for Q2FY17 stood at Rs.12mn against Rs. 60mn y-o-y.

  14. 4)  Further contracts for supply to Ashok Leyland have been finalised and shall add Rs. 400mn to 500mn to the annual top-line.

  15. 5)  Lava cast currently operating at 30% capacity utilisation shall touch 60% by Q1FY18 and has a revenue visibility of about 400mn to 600mn for FY18.

  16. 6)  OEM supply for LCV Clutches has started for Tata ACE, and has a revenue visibility of Rs. 200mn for the next financial year. Besides 4 more OEM customers that currently source M&HCV clutches from setco are expected to start procuring LCV clutches aswell, in the next financial year.

  17. 7)  Over 50% of product range of tractor clutches has been developed and is being tested at different levels, by the end of FY18 setco is forecasting 25-30% market share in tractor clutches and potentially 3 lakh tractors out of 5 lakh tractors produced in a year shall use setco clutches.

  18. 8)  2nd half of the year being a seasonally better year for tractor and M&HCV sales and on account of good rabi crop due to adequate monsoon, Q3 & Q4 shall see reasonable demand traction. A yoy annual growth rate of 8-12% can be expected.

  19. 9)  Cost benefits due to sourcing of raw-mat from lava cast shall expand EBITDA margins by 1.5% to 2% in the FY18 going ahead an EBIDTA margin of 15% can be estimated conservatively.(13.1% for H1FY17)

  20. 10)  In the near future no additional capex is envisaged and hence debt shall reduce progressively thus relaxing the burden of finance costs gradually, although to meet the capital requirement of phase 2 of lava cast (Rs.100crs) equity dilution may take place within the next two years, although it cannot be quantified as of now.

Disclaimer

This document has been prepared and compiled from reliable sources. While utmost care has been taken to ensure that the facts stated are accurate and opinions given are fair and reasonable, neither the Company nor any of its Directors, Officers or Employees shall in any way be responsible for the contents. The Company, its Directors, Officers or Employees may have a position or may otherwise be interested in the investment referred in this document. This is not an offer or solicitation to buy, sell or dispose off any securities mentioned in this document.

Copyright © 2016 Pankaj Mangaldas Securities pvt. ltd. , All rights reserved.

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