Setco Auto Q3FY17 Concall Key Take Aways.

Nov 19, 20173 min read

February 15, 2017 | PM Securities

Our take (Q3FY17 Earning’s call KTA’S)

Setco has been operationally consistent with their growth plans, as expected we have witnessed a financial underperformance for the past two quarters and it is only with a time lag of a quarter or two more than the new ventures of Setco will start paying off.

LCV Business & USA Distribution business give a good top-line growth visibility for the FY18, meanwhile advent into tractor clutch business with very less competition in a year of good rains can aid good addition to the top-line for this vertical too. Potentially tractor business can translate into a big opportunity and acquiring a 50-60% of the market share of the entire industry in a matter of 2-3 years seems quite achievable. Lava cast shall aid reduction in raw-mat prices leading to a conservative estimate of EBITDA margin growth by 2-2.5%. Further capital requirement for lava cast might be met by equity dilution but with lava cast having reasonably good payback periods, that should be a matter of concern.

As per our view from a quarter ago we would stick to our opinion that FY18 shall be a year of reforms for Setco, We envisage Q3FY18 to be the quarter from whereon Setco’s financial outperformance can be expected.

Q3FY17 Earning’s call KTA’s

Topline: Inline with our Q2FY17 take on Setco there was a visible impact on its topline growth on account of demonetization nonetheless as forecasted better seasonal sales of new vehicles and setco’s aftermarket sales cushioned it in the bad times and enabled a marginal 3.7% y-o-y top-line growth.
Ebitda Margins: Dropped by 3.2% y-o-y from 16.34% to 13.1% on account of time lags in incurring certain one time expenses which will be adjusted in the next quarter, hence on a 9 month basis there’s no adverse impact on margins rather they’ve expanded marginally by 20bps from 12.9% to 13.1% y-o-y.
PAT: Took a nose dive from Rs. 65.2 Mn to Rs. 31.6 Mn on account of depleted EBITDA margins and increase in finance cost by 1.1% nonetheless both of these factors are a result of spill overs of expenditures from another quarters and shall get corrected on an annual canvas.
Operational Progress: - Supplies of LCV clutches to Ashok Leyland & Tata Motors has already started to OEM and OE to after market. - As per the previous announcement of entering into the tractor market, Setco is on schedule and will be seen in the market by the end of the current financial year, supply to OEM’s for tractor clutches shall commence in Q1FY18. - USA market distribution of dual disk clutches will begin by this financial year end. The first shipment is expected to be done by February 2017 end. A target of 15,000 sets of dual disks is set in the first year with an expectation to hit a target of 45,000 sets by the third year where the cost is Rs.270 to Rs.350 per set (@67Rs./$) and EBITDA margins are expected to be around 25% as against ~16% in India. - Lava cast is already operating at ~50% capacity and is expected to reach 66% in the next financial year.

5) FY18 Additional Revenue estimates (Besides organic growth):

Recap (Our take (Q2FY17 Earning’s call KTA’S):

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

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.

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