Auto Ancillaries

Good times ahead…

Table of Contents

INDUSTRY & OUTLOOK ��������������������������������������������������������������������������������������������������������������2

CRAFTSMAN AUTOMATION LIMITED ������������������������������������������������������������������������������������7

ENDURANCE TECHNOLOGIES LIMITED ���������������������������������������������������������������������������������23

SONA BLW PRECISION FORGINGS LIMITED �������������������������������������������������������������������������36

SUPRAJIT ENGINEERING LIMITED ������������������������������������������������������������������������������������������62

VST TILLERS TRACTORS LIMITED �������������������������������������������������������������������������������������������79

Ashwin Patil | [email protected]

January 2024
+91 22 6635 1389
 January 4, 2024 Sector Update

AUTO ANCILLARIES
Good times ahead…

We have analysed various auto ancillary businesses based on valuation multiples, likely earnings growth, RoE and several business risks. For long-
term investment purpose, we prefer businesses with market leadership, higher share of business with OEMs, clean corporate governance, reducing
exposure to CV cyclicality, EV agnostic, ability to manage capital structure/efficiency, and ability to innovate. Following these fundamentals, our
top picks in the space for long-term investment are Craftsman Automation, Endurance Technologies, Sona BLW, Suprajit, VST Tillers & Tractors
looks promising candidate to us among small caps automobile space. We believe within our coverage universe Apollo Tyres, Exide Industries, CEAT
and Balkrishna are trading higher than their fair value.
Business Cyclicality
We recommend to stay away from cyclical businesses with elevated multiples. Business cyclicality for India auto ancillary businesses is driven by
either domestic CV cycle or input commodity cycle with rest of the growth and margin drivers being largely stable in nature. Thus, post domestic
M&HCV market likely regaining FY19 highs by FY24 end in volume terms (~20% higher in tonnage carried terms), we see high probability of
the cycle peaking out by FY25E. Thus, businesses dependent on domestic CVs can face ~10-15% segmental revenue decline in FY26E driven by
market decline. Therefore, it would be better to avoid companies with higher exposure to this segment. Rising input commodity risk is another
key risk that can swing earnings massively by impacting business profitability. Thus, avoid automotive tyre businesses (natural rubber and crude
dependency) and battery business (lead) with relatively low pricing power and high capital intensity, currently operating at elevated EBITDA
margins and trading at the higher end of valuation multiple trajectory.
Avoid companies with volatile profitability and elevated valuation
We recommend staying away from players with higher element of cyclicality in profitability, operating at higher end of margin currently along with
trading at higher end of valuation multiple band. Thus, automotive tyre stocks, operating at peak margins and trading above long-term average
forward P/E multiples should be avoided. We would rather prefer businesses that have multiple business lines, presence across geographies, niche
product segments, strong topline visibility, have the capability to execute and sustain operating margin across OEM cycles and withstand input
commodity cost volatility seamlessly, thus, giving visibility to cashflow ahead. Therefore, we like , Sona, Craftsman, Suprajit, Endurance and VST Tillers.

Mcap ROE EPS CAGR Net D/E P/E EV/EBITDA

Companies Comments
(₹ bn) FY26E (FY23-26E) (FY26E) (FY26E) (FY26E)
Reducing CV exposure and improving return ratios with
Craftsman 113 22.2% 34.7% 0.47 17.7 9.0
growth

Endurance 251 15.4% 28.0% 0.07 26.7 14.3 Domestic 2Ws and global EV demand

High growth + return ratios coupled with rising global EV

Sona BLW 360 23.4% 32.0% 0.08 41.0 26.4
demand

Domestic 2Ws and recovery in global business to drive

Suprajit 51 14.4% 14.0% 0.10 22.3 12.1
performance

High growth led by partnerships, new products and

VST Tillers 33 18.1% 34.0% -0.17 14.0 9.7
regional spread

Ashwin Patil | [email protected]

+91 22 6635 1389
LKP Research
 AUTO ANCILLARIES | Sector Update

Automobile Industry
The two-wheeler segment dominates the Indian auto industry (approximately 75% by volumes) and primarily dictates its tone. The industry
saw a decline of 2.9% CAGR (between FY17 to FY23) in total 2W sales along with a 4.2% CAGR in the PVs and 5.2% in CVs segments. A decline
of 7.5% in three-wheelers was observed. We observed a strong bounce back in all segments in FY 23 over FY 22 on low base and rapid recovery
over pandemic years. Demand and production were very much back on track as CVs/2Ws/PVs/3Ws all grew handsomely by 34%/17%/27%/88%
respectively. Electronic vehicles (EVs) are gaining in India and are growing faster than internal combustion engine (ICE) vehicles across the 2W, 3W
and 4W sectors.

Sales volume, Sales volume, CAGR% Sales volume, CAGR%

Automobile segments FY 23E (% YoY) FY 27E
FY 17 FY 23 FY 17-23 FY 22 FY 23-27E
CVs 0.71 0.968 5.2% 0.716 34% 1.27 7-8%
2Ws 19 15.9 -2.9% 13.6 17% 22.43 9-10%
PVs 3.05 3.9 4.2% 3.06 27% 5.17 7-8%
3Ws 0.78 0.49 -7.5% 0.26 88% 0.58 4-5%
Source: Industry, LKP Research

Auto Component Industry

The auto-component industry is a proxy to the automobile industry

Auto component production split by vehicle categories

5% 5% 5% 5% 5% 7% 2% 7%
7%
15% 14% 15% 18% 12% 11% 19%
18% 18%

55% 57% 54% 50% 54% 55%

57% 53%
53%

2% 2% 2% 2% 1%
1% 1% 2%
2%
24% 23% 24% 26% 26% 26% 21%
19% 20%

FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY27P

2W 3W Cars and UVs CVs Tractors

Source: Industry, LKP Research

Auto component production split by OEMs, aftermarket, and exports

₹ 2,732 bn ₹ 3,873 bn ₹ 5,306 bn

CAGR ~13% CAGR ~14%
17%
23%
32%
17% CAGR ~10%
19% CAGR ~6%
19%

66% CAGR ~5% 58% CAGR ~3% 49%

FY17 FY22 FY27P

OEM Replacement Exports

Source: Industry, LKP Research

LKP Research 3
 AUTO ANCILLARIES | Sector Update

Industry bodies CRISIL MI&A expects the auto component market size to grow at a 5-7% CAGR between FY22 and FY27, comparable to the 7%
CAGR observed between FY17 to FY22.

OEM demand is expected to grow at a 2-4% CAGR between FY22 and FY27 on the back of robust production growth across asset classes in the
medium term an aided by realization growth via OEM price increases and new launches. Outsourcing in the commercial vehicle segment is lower
than for cars but is expected to increase owing to growing technological spends by auto component players due to BS VI and safety norms.

In the replacement markets, the auto component market is projected to grow at a 5-7% CAGR between FY 22 and FY 27 due to increased OEM
demand between FY17 and FY19, along with a replacement cycle of two to three years. Moreover, auto component players undertook price hikes
in recent months to offset the uptick in commodity prices. Hence, rising realization, to some extent, coupled with pent-up demand from FY 2021
wherein the vehicular movement was restricted, is likely to support demand growth.

Auto component exports are projected to grow at a 13-15% CAGR between FY22 and FY27. As India is enhancing quality and safety standards,
players are likely to gain an edge in newer geographies such as other low-cost manufacturing countries. The penetration of Indian automotive
components in global exports stands lower as on date, indicating considerable scope for domestic manufacturers to expand their export share in
the coming years as they expand into new geographies and widen their product offerings.

In the next five years as well, exports will be primarily driven by the United States of America heavy truck segment, and demand from other key
destinations such as Italy, Turkey, and Brazil. The gradual shift of European countries to electric and hybrid cars could offer a huge opportunity for
low-cost producing countries such as India in the electric parts segment.

Segment-wise production break-up in FY 22

Source: Industry

LKP Research 4
 AUTO ANCILLARIES | Sector Update

Automotive Components produced by the Indian automotive components industry

Electrical & Exhaust

Suspension & Drive transmission & Interiors
Engine & engine parts Body and chassis electronics management and
braking parts steering parts (nonelectronics)
parts cooling systems
Suspension Steering Sheet metal Seating
Piston and piston parts Starter motors Exhaust pipes
parts system parts system
Fuel injection equipment Axle
Braking parts Fuel tanks Generators Mirrors Mufflers
and carburettors assembly
Powertrain components
Clutch Plasticmoulded Plasticmoulded Catalytic
(cylinder heads, cylinder Alternators
assembly components components convertors
blocks)
Wheel and Rubber Rubber
Engine cooling systems Flywheels Radiators
wheel rims components components
Other powertrain
Locks Magnetos Cooling fans
components
Engine bearings and Ball and roller Distributors
valves bearings and regulators

Exhaust systems

Gaskets, liners, and

filters

Other engine parts

Source: Industry, LKP Research

Outlook for the auto component sector

Vehicle production across segments is growing at a good pace, supported by government focus on capital expenditure, and the resultant pickup in
the economy. The chip shortage issue seen over the past couple of years has also eased down rapidly, leading to expedition of vehicle production.
This is triggering fast demand for auto components. CRISIL MI&A expects almost all vehicle segments to log robust production growth between
FY22 and FY27. Production of 2Ws, 3Ws, PVs and CVs are projected to grow at a CAGR of 10-12%, 12-14%, 10-12% and 11-13%, respectively,
over the forecast period. Key macroeconomic trends are also likely to support demand for 2Ws, 3Ws, and PVs over the medium to long term.
CRISIL MI&A expects urbanization to reach 37-38% by FY27 from approximately 35% in 2020. India’s per capita income is also projected to log a
6-7% CAGR between FY22 and FY27. These factors are likely to drive premiumization across vehicle segments. India’s population is among the
youngest in the world, with a median age of 28 years. About 90% of Indians will be below the age of 60 by the end of CY 23. Industry forecasts that
approximately 64% of them will be between 15 and 59 years by 2031. Infrastructure improvements are expected to support automobile demand
on account of employment generation, and improved accessibility and mobility.

Auto components should grow at faster rate than OEMs as they cater across the auto industry – 2Ws, PVs, CVs, tractors and most of them are not
dependent on anyone of the above mentioned segments. Therefore their risk is widely spread and balanced. Sectorally speaking, currently we
expect 2Ws to perform better than any other segment on low base, new launches, faster penetration, affordability and charging infrastructure
for EVs and sentimental positivity. PVs are catering to the pent up demand and and unprecedented growth in SUVs. CVs are seeing a slight
consolidation on high base and CV cycle trough. Tractors are impacted by lower than normal rains and unseasonal rainfall off late. Therefore, auto
components which are big suppliers to 2Ws look better to us over the next one year.

LKP Research 5
 CRAFTSMAN AUTOMATION LIMITED
.....Crafting a promising future!

We believe the Power train business will be driven by expected pick up in Replacement cycle
Rating BUY
for HCVs in the medium term and also fresh demand rising by movement in the investment
Current Market Price (₹) 5,143
capex cycle of the country. Dieselization demand from all over the world and localization of
12M Price Target (₹) 6,098
diesel vehicle demand should lead to strong demand for Power trains. Rising infrastructure
growth, construction, mining, agri-commodities transportation, increasing freight rates etc Potential upside (%) 19

will all lead to a very strong growth in the CV industry. However, the real demand growth
may come in FY26 only as FY24 and FY25 may see soft growth on high base of FY23. New Stock Data
order from a global CV player also should aid growth in FY26. Exports business (now 10% of Sector Auto Components
topline) and electrification shall drive the Automotive Aluminum business. New orders from
FV (₹) 5
Stelantis shall provide the required fillip from H2 of FY25. Pick up in 2Ws and EVs should
Total Market Cap (₹ bn) : 109
augur well for Aluminium business which is currently in ramp up stage. Both Storage and
Free Float Market Cap (₹ bn) : 49
non- storage businesses shall lead to a strong growth in the Industrial Engg business in H2.
52-Week High / Low (₹) : 5,514 / 2,735
DR Axion acquisition seems to be a strategic/synergic fit which is 30% of topline and is 12M Avg. Dly Traded Volume (in lakh) 0.49
giving boost to the consolidated business. The increased capex guidance and debt raised BSE Code / NSE Symbol 543276 / CRAFTSMAN
for acquisition may result into some pressure on the financials in the short term. However, Bloomberg : CRAFTSMAN: IN
robust cash generation stemming from strong operational performance shall lead to
comfortable financial leverage. Improvement in FCF and return ratios in line with strong
Shareholding Pattern
operational efficiencies along with track record of creating and gaining market leadership
(%) Sep-23 Jun-23 Mar-23 Dec-22
organically is uncommon in the auto component industry. We estimate the consolidated
Promoter 54.99 54.99 58.77 58.77
revenues/EBITDA/PAT to grow at a CAGR of 23%/24%/35% in the period between FY23-
FPIs 12.68 12.10 8.79 9.33
26E. We value Craftsman Automation Limited (CAL) at 21x rolled over earnings of FY26E
MFs 13.29 13.20 12.37 11.09
(currently trades at 17.7x). Maintain BUY with a target of ₹ 6,098.
AIFs 3.99 4.00 4.18 4.23
Power-train business to slow down in FY24-25E, but may grow thereafter
Bodies Corporate 1.68 1.85 1.96 1.90
PT business witnessed a soft growth in Q2 driven by slowdown in CV industry. Management
IFC 4.79 4.79 4.79 4.79
expects the segment to grow at high single digits to low double digit over the next two years
Others 8.58 9.07 9.14 9.89
due to high base of FY23. They expect it to start growing at a rapid pace from FY26 as they
Source: BSE
are working with a large global customer for exports order which should start by FY26. CAL
is building up new capacities near its main plant at Coimbatore to cater to the demand for
Price Performance
OTH segment.
(%) 1M 3M 6M 12M
Key Financials FY 23 FY 24E FY 25E FY 26E Craftsman 0.8% 10.6% 29.4% 54.5%
Total Sales (₹ mn) 31,826 45,808 51,920 58,959
Nifty 50 6.2% 10.2% 11.4% 22.3%
EBITDA margins (%) 21.5% 20.6% 21.3% 22.3% * To date / current date : January 3, 2024
PAT margins (%) 7.9% 8.4% 9.2% 10.4%
EPS (₹) 118.9 182.6 225.2 290.4
Craftsman vs Nifty 50
P/E (x) 43.2 28.2 22.8 17.7
160
P/BV (x) 7.5 6.1 4.9 3.9 140
EV/EBITDA (x) 17.5 12.7 10.8 9.0 120
100
ROE (%) 17.5% 21.6% 21.5% 22.2%
80
ROCE (%) 18.0% 21.7% 22.2% 23.4% 60
Dividend yield (%) 0.1 0.4 0.4 0.6 40
20 Craftsman Automation NIFTY 50
0
Jan-23 Apr-23 Jul-23 Oct-23 Jan-24

LKP Research 6
CRAFTSMAN AUTOMATION LIMITED

DR Axion (DRA) numbers strong, to excel further

DR Axion (DRA) is a South Korean company who’s acquisition has proved to be a feather in the
cap for the company. It caters mainly to the PV industry in the domestic markets where CAL was
slightly present. DRA is a very strong performer and is lifting up CAL’s performance since it has
been consolidated in the numbers. DRA’s revenues came in at ₹3.5bn (~30% of consolidated
revenue) during the quarter. EBITDA was at ₹647 mn with margin at 18.3%. EBIT margin came
in at 15.4% during the quarter. Management expects 10-15% yoy growth in this business going
forward. It is expected to be driven by product mix and growth in customer base. DRA’s key
client M&M (40% of revenue) is anticipated to outperform the underlying industry, led by robust
order backlog and its dominance in the growing SUV market. DRA’s another client Hyundai-Kia’s
Talegaon plant facility capacity expansion should add 5-10% to DRA’s topline by FY 25 once the
plant commissions. We believe DRA to be an important growth driver for CAL going forward and
add a substantial amount of revenues and assist margin performance.
Aluminum products post strong performance, expect continuity
Auto Aluminium business division has been supplying aluminium products to automobiles,
especially the 2Ws worldwide. Its performance has been improving every quarter. In the recent
quarter too, it posted a strong performance as the 2W industry saw a strong recovery on the
domestic side. Further, it is likely to grow due to start of orders from Stellantis in Q3 FY25. The
segment is in ramp up stage to fullfill various other order as well. All order wins over last two
years are translating now. Therefore we saw a strong expansion in margins as well in Q2. We
expect the strong numbers to continue going forward and to grow at 20%/17% in FY 24E/FY 25E
with margins expanding as business flows in.
Industrial & Engineering business robust
Management mentioned that there was a pause in storage business in Q2, but expect a
strong H2. It has an order book of ₹1 bn in automated storage business. Revenue from storage
business in H1 was ₹1.64 bn (46% of segmental business revenues), out of which 27% came
from automated storage. Management expects the automated storage business to grow faster
than static/manual storage.

LKP Research 7
CRAFTSMAN AUTOMATION LIMITED

Business Overview
Craftsman is a diversified engineering company with vertically integrated manufacturing
capabilities, engaged in 3 business segments, namely Powertrain and other products for the
automotive segment, Aluminum products for the automotive segment, and Industrial and
Engineering products segment. Craftsman is the largest player involved in the machining of
cylinder blocks and cylinder heads in the intermediate, medium and heavy commercial vehicles
segment as well as in the construction equipment industry in India. They are among the top 3-4
component players with respect to machining of cylinder block for the tractor segment in India,
while #1 supplier to commercial vehicles. Craftsman is present across the entire value chain in
the Automotive-Aluminium Products segment, providing diverse products and solutions. Their
strong in-house engineering and design capabilities help them offer comprehensive solutions
and products to their long standing domestic and international customers in each of the
segments in which they operate.

Automotive Powertrain business - Their key products in this segment are highly engineered and
include engine parts such as cylinder blocks and cylinder heads, camshafts, transmission parts,
gear box housings, turbo chargers and bearing caps. The end users for their products include
OEMs producing commercial vehicles, special utility vehicle, tractors and off-highway vehicles.
Additionally, they also provide machining services within their Automotive – Powertrain and
Others segment. Over the years, they have been instrumental in import substitution for critical
powertrain parts.

Aluminium Products segment - Within their Aluminium Products segment, they are equipped
with an array of processes including the high pressure die casting, low pressure die casting and
gravity die casting machines to manufacture components, machining tools for machining and
assembly lines. Their key products are highly engineered and include crank case and cylinder
blocks for two wheelers, engine and structural parts for passenger vehicles and gear box housing
for heavy commercial vehicle. The recent acquisition of Korean DR Axion is incorporated in this
businesss. It is a strong player in supplying cylinder blocks and cylinder heads to PV players such
as M&M, Kia and Hyundai in India. The acquisition cost was at ₹3.75 bn. CAL has incorporated
this acquisition under the Aluminium products business.

Industrial and Engineering segment - Craftsman has utilized their in-house engineering
and design capabilities and developed a diverse product portfolio across 2 sub-segments,
namely, (i) the storage solutions sub-segment under which they have the complete solution
for conventional/automated storage; and (ii) the high end precision products sub-segment
under which they manufacture aluminium products for power transmission, high-end precision
products and undertake sub-assembly, material handling equipment such as hoists, crane kits
and industrial gears, manufacture gear and gear boxes, marine engines and accessories, special
purpose machines (“SPM”), which includes metal cutting and non-metal applications such as
washing and leak testing solutions and tool room, mould base and sheet metal. In their storage
solutions business, Craftsman provides diverse products and solutions such as pallets, racking,
shelving, vertical storage solutions to several sectors such as FMCG, Ecommerce, food and
beverages, logistics, pharmaceutical and electronics

LKP Research 8
 CRAFTSMAN AUTOMATION LIMITED

Clientele
Automotive Powertrain & Others segment Automotive Aluminium Products segment Industrial & Engineering segment
Daimler India Escort Daimler India Siemens
Tata Motors Ashok Leyland TVS Motors, Mitsubishi
Tata Cummins Perkins Royal Enfield,
Mahindra & Mahindra Mitsubishi Perkins
Simpson & Co. Ltd. John Deere Mahindra & Mahindra.
TAFE JCB India
Source: Company, LKP Research

Business verticals

Craftsman Automation

Powertrain Components Aluminium Products Industrial & Engineering

( Automotive ) ( Automotive ) ( Non-Auto )

FY 2023 FY 2023 FY 2023

Revenue: ₹ 15.3 bn Revenue: ₹ 7.4 bn Revenue: ₹ 7.1 bn

(51.2% of total revenue) (24.8% of total revenue) (23.9% of total revenue)
EBIT: ₹ 3.82 bn EBIT: ₹ 645 mn EBIT: ₹ 623 mn
EBIT Margin: 25% EBIT Margin: 8.7% EBIT Margin: 10.8%

Source: Company, LKP Research

LKP Research 9
CRAFTSMAN AUTOMATION LIMITED

Investment Argument
Wide product range and market leadership in cylinder blocks and cylinder heads gives a
competitive moat
Craftsman is the largest player involved in the machining of cylinder blocks and cylinder heads in
the intermediate, medium and heavy commercial vehicles segment as well as the construction
equipment industry and is also among the top 3-4 players in machining of cylinder blocks for
tractor segment in India. They are present across the entire value chain in the Aluminium
Products segment, providing diverse products and solutions. They offer comprehensive one-
stop solutions to their customers including design, process engineering and manufacturing
including foundry, heat treatment, fabrication, machining and assembly facilities. They are
diversified across end-user industries and cater to commercial vehicles, two-wheeler, tractor
and other segments. They actively pursue cross-selling opportunities across segments to derive
value for their existing and prospective customers. This not only helps them in solving complex
customer problems that require multi-domain expertise but also helps them in penetrating
customers’ different business segments and enhance their capabilities to collaborate with
OEMs right from the designing of their new products. Their diversified presence across various
segments and design capability provides them with the flexibility to operate successfully across
business cycles and mitigate any fluctuations in the industry.
CAL’s dominance continues in the PT business
In the power train segment, the company machines critical engine components such as cylinder
blocks, cylinder heads, camshafts, transmission parts, gear box housing, turbo chargers and
bearing caps with technological superiority. The company supplies to customers like Tata
Motors, Daimler India, M&M, Tata Cummins, Simpson & Co., TAFE, Escorts, Ashok Leyland,
Perkins, Mitsubishi Heavy Industries, John Deere, Nelcast, Brakes India and JCB etc. The
company is a single source supplier to almost all of its clients. It manufactures these parts at
7 manufacturing facilities at Bengaluru, Coimbatore, Faridabad, Jamshedpur, Pithampur, Pune
and Sriperumbudur. Power train business contributed about 48% of total revenue and 66% in
EBIT in Q2 FY24. Revenues in the power train business majorly comes from M&HCV segment
(~57%) followed by farm equipment (14%), construction (18%) and PVs (11%). CAL’s Share
of Business (SOB) is 80-100% with its clients. Such criticality and OEM’s investments ensures
customer stickiness. Around top-10 pure machining players (competition) constitute 50% of
machining revenue of Craftsman in FY 23. This dominance is expected to increase.

However, PT business witnessed a soft growth in Q2 FY24. Management expects the segment
to grow at high single digits to low double digit over the next two years due to high base of FY
23. They expect it to start growing at a rapid pace from FY 26 as they are working with a large
global customer for exports order which should start by FY 26. CAL is building up new capacities
near its main plant at Coimbatore to cater to the demand for OTH segment.

On the same lines, we would like to mention that in exports markets, we need to note that
European and North American foundries are not investing in fresh capex, given higher labour
costs and emission norms. Also, China’s labour costs have risen; thus India is expected to
benefit from likely outsourcing of foundry and machine operations. We believe Craftsman will
be one of the biggest beneficiaries of this as the company is focused on export business in the
powertrain segment (through Nelcast and Brakes India).

LKP Research 10
 CRAFTSMAN AUTOMATION LIMITED

Also launch of new value added products for the existing customers, tapping of new customers
or through Tier II exports, the company is finding access to larger markets, which will be big
drivers of growth in this segment. New product launches from Craftsman as well as its M&HCV
customers should boost the segment revenues. Exporting of Craftsman’s products by Indian
arms of their MNC clients to their parent companies as well as direct exporting to their own
foreign markets is also seen as a very big opportunity for Craftsman.

We believe the Power train business will be driven by expected pick up in Replacement cycle
for HCVs in the coming quarters and also fresh demand rising by movement in the investment
capex cycle of the country. However on high base, we believe this growth to be slow in initial
years of FY 24-25. Dieselization demand from all over the world and localization of diesel vehicle
demand should lead to strong demand of >20% for Power trains. Rising infrastructure growth,
construction, mining, agri-commodities transportation, increasing freight rates etc will all lead
to a decent 7-8% growth in the CV industry over the medium to long term.

Product and clientle of CAL

CYLINDER TRANSMISSION DIFFERENTIAL

CYLINDER HEAD CAMSHAFTS BEARING CAP
BLOCK HOUSINGS CARRIER HOUSING

Products

Commercial Vehicles Special Utility Vehicles Tractors Off-highway Vehicles

End-user sectors

Daimler India Tata Motors Tata Cummins M&M Simpson & Co. TAFE
Clientele
Escort Ashok Leyland Perkins Mitsubishi John Deere JCB India

Source: Company, LKP Research

Clientele-wise break-up of CAL - Q2 FY24 Powertrain industry (₹ bn)

900 846
800 772
PV 688
11% 700 651
581
600
524 508
OHT 500
18%
400

CV 300
Tractors 57% 200
14%
100
0
FY 18 FY 19 FY 20 FY 21 FY 22P FY 23P FY 24E

LKP Research 11
 CRAFTSMAN AUTOMATION LIMITED

Break-up of cylinder block industry by vehicle segment Break-up of cylinder head industry by vehicle segment

OHT OHT
4% 4%

Tractors Tractors
22% 22%
SUV
SUV 40%
45%

CV CV
29% 34%

Source: Company RHP, LKP Research

Key players in Powertrain and Transmission manufacturing and machining business

Key Players 2 wheelers/ 3 wheelers Passenger vehicles Commercial Vehicle Construction Equipment Tractor
Avtec √ √ √ √ √
Endurance √
Jaya Hind industries √ √ √ √
Sundaram Clayton √ √ √
Alicon Cast Alloy √ √
Ashok Iron works √ √
Continental Engines √ √
DCM Engineering Products √ √ √ √
Hinduja Foundaries √ √ √ √
Nelcast √ √
Kirloskar Ferrous Industries √ √ √ √
Craftsman Automation Ltd √ √ √ √ √
Source: Company RHP, LKP Research

Powertrain Business
(₹ mn) FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E
Revenues 6,470 8,490 10,080 7,090 8,110 11,544 15,271 16,340 17,974 20,490

Growth (%) 31.2% 18.7% -29.7% 14.4% 42.3% 32.3% 7.0% 10.0% 14.0%

EBIT 710 1,161 1,929 1,181 1,785 3,037 3,820 3,431 3,918 4,764

Margins % 11.0% 13.7% 19.1% 16.7% 22.0% 26.3% 25.0% 21.0% 21.8% 23.3%
Source: LKP Research

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 CRAFTSMAN AUTOMATION LIMITED

Aluminium Products – Small business growing at a good pace

The company entered into this business in 2014, and is small in revenue terms compared to other
aluminium die-casters, with capacity of 20,000 tonnes per year. CAL is one of the companies
which manufacture all kinds of castings such as high-pressure and low-pressure die-castings
along with gravity die-castings. Under this business, CAL manufactures products like crank cases
and cylinder blocks for two-wheelers, engine and structural parts for passenger vehicles and
gear-box housings for heavy commercial vehicles. This business contributed 28% to the total
topline and 28%% to the EBIT in Q2 FY24. Aluminium products are manufactured in Bengaluru
and Coimbatore for main of its 2W clients like TVS, RE, M&M and Daimler. Since the company
has low capacities, the company’s share of business is less than of the OEM requirement. Post
implementation of BS-VI, most OEMs explored various possibilities to light-weight their vehicles
by using non-ferrous metals like aluminum to reduce carbon emission. With OEMs seeking to
further reduce the weight of their vehicles, increased use of aluminum offers attractive growth
prospects for companies like Craftsman. Currently 80% of standalone revenues come from the
2 wheeler segment with major contributors being TVS motors and Royal Enfield. The company
is looking to expand its business in the PVs segment through winning new business from PSA
and others OEM. Although the EBIT margin is low in this business as capacity utilization is low
(50% utilization in Q2FY24) going ahead margins should improve on operating leverage, value
added product launches and price hikes.

The company has incurred ~₹4 bn capex in the last four years and we expect peak revenue
of ₹6.5bn in the next 2-3 years. The long-term prospect of aluminum products are bright as
more OEMs would increase aluminum content to comply with corporate average fuel efficiency
norms (CAFÉ) and cater to the EV wave as well.

This division posted a strong performance in Q2 FY24 as the 2W industry saw a strong recovery
on the domestic side. Further, it is likely to grow due to start of orders from Stellantis in Q3 FY
25. The segment is in ramp up stage to fullfill various other order as well. All order wins over last
two years are translating now. Therefore we saw a strong expansion in margins as well in Q2.
We expect the strong numbers to continue going forward and to grow at 20%/17% in FY 24E/FY
25E with margins expanding as business flows in.

Automotive Aluminium Products segment

GRAVITY DIE CASTING HIGH PRESSURE DIE CASTING LOW PRESSURE DIE CASTING

Products

Two-Wheelers Passenger Vehicles Commercial Vehicles

End-user
sectors

Clientele
Daimler India TVS Motors Royal Enfield Perkins M&M

LKP Research 13
 CRAFTSMAN AUTOMATION LIMITED

Break-up of aluminum die-casting industry Break-up of aluminum die-casting industry

Automotive - Aluminum die-casting industry (₹ bn)
Channelwise Segment-wise

220 - 225 Aftermarket CV

207 4% 5%
Exports
182 18% PV
169
25%
135

2W
70%
OEM
78%
FY 18 FY 19 FY 20 FY 21 FY 24P

Company RHP, LKP Research

Aluminium Products
Key Competitors
Rockman Industries ₹ mn FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E

Sunbeam Auto Revenues 1,160 2,300 3,080 2,580 3,298 5,520 7,406 9,035 10,842 12,685

Alicon Castalloy Growth (%) 98.3% 33.9% -16.2% 27.8% 67.4% 34.2% 22.0% 20.0% 17.0%
Sundaram Clayton EBIT 104 59 183 71 20 410 645 1,247 1,529 1,941
Endurance Technologies. Margins % 9.0% 2.6% 5.9% 2.8% 0.6% 7.4% 8.7% 13.8% 14.1% 15.3%
Source: LKP Research

Acquisition of DR Axion - A synergic fit!

By the end of Q3 FY23, CAL acquired majority stake in the Chennai based Indian arm of South
Korea based auto ancillary firm DR Axion for a consideration of ₹3.75 bn, out of which ₹3 bn
was raised through debt and rest through internal accruals. DR Axion is a supplier of aluminium
cylinder heads to PVs like Hyundai, Kia, M&M, Toyota, Tesla etc. Through this acquisition, CAL
has got a very good entry into PV segment where they lacked presence. Also apart from India
and Korea, CAL is enhancing its global footprint as DR Axion is #3 supplier in US markets.

DRA’s revenues came in at ₹3.5bn (~30% of consolidated revenue) during Q2 FY24. EBITDA
was at ₹647 mn with margin at 18.3%. EBIT margin came in at 15.4% during the quarter.
Management has guided at a steady state EBITDA margin at 16-17%.

DRA’s key client M&M (40% of revenue) is anticipated to outperform the underlying industry,
led by robust order backlog and its dominance in the growing SUV market. The merger is not
only expected to be operationally beneficial, but also EPS accretive from the first year of the
acquisition, and its full benefits are expected to reflect from FY24 onwards. Management
expects 10-15% yoy growth in this business in FY24. It is expected to be driven by product
mix and growth in customer base. DRA’s another client Hyundai-Kia’s Talegaon plant facility
capacity expansion should add 5-10% to DRA’s topline by FY 25 once the plant commissions.
We believe DRA to be an important growth driver for CAL going forward and add a substantial
amount of revenues and assist margin performance.

LKP Research 14
CRAFTSMAN AUTOMATION LIMITED

DR Axion

Revenues (Rs mn) EBITDA mrgins (%) EBIT margins (%)

18.1% 18.3%

14.4% 15.4%

10.7%

7.3%

1,949 2,819 3,546

Q4 FY23 Q1 FY 24 Q2 FY24

Source: Company, LKP Research

Diverse Industrial segment provides multiple growth opportunities

The industrial engineering division (23% of topline and 17% of EBIT) started operations in 1986.
This segment is well diversified and the major portion is coming from high end products and
subassemblies for contract manufacturing. The high-End Sub-Assembly, Contract Manufacturing
can be divided into five sub-segments - Aluminum products for power transmission, Gear and
Gear boxes, Sheet metal fabrication, SPM Manufacturing (which includes metal cutting and
non-metal applications such as washing and leak testing solutions) and Tool room & mold base.
The company manufactures these parts at three manufacturing units at Coimbatore, Bengaluru
and Pune. The company has also the Storage solution business which is now fast growing
segment in the logistics area and ramping up fast with traction in e-commerce activities and is
contributing more than 40% of the total segment revenues. Key customers are Mitsubishi Heavy
Industries, Rhein Getreibe and regional warehouses by e-commerce, organized retailers, FMCG
companies, consumer durables, auto-component makers and cold storage. The key storage
products are stationary racks for warehouses, V-store, toll-form products and automated storage
and retrieval systems. The organized storage solutions industry, comprising pallets, racking and
shelving, is expected to grow at 19-21% CAGR of 3 yeras to reach ₹38 bn in FY24E. This would be
driven by warehouse consolidation due to GST implementation and the growth across end-user
industries such as e-commerce, organized retailing, consumer durables, auto components and
pharmaceuticals as well as cold storage industries. V-store - The company expects the storage
business to continue its growth trajectory and become an independent business segment over
the next few years with Automated storage gaining a distinct importance as it now contributes
27% of the total storage business vertical.

Management mentioned that there was a pause in storage business in Q2 FY 24, but expects a
strong H2. It has an order book of ₹1 bn in automated storage business. Revenue from storage
business in H1 was ₹1.64 bn (46% of segmental business revenues), out of which 27% came
from automated storage. Management expects the automated storage business to grow faster
than static/manual storage.

LKP Research 15
 CRAFTSMAN AUTOMATION LIMITED

Industrial & Engineering Products

High end sub-assembly, contract manufacturing & others Storage Solutions

Tool room, Mould Aluminium-
Material Gear & Gear
SPM base & Sheet Casting for power
handling boxes
metal transmission

Pallets, Racking,
shelving and
Metal cutting, Chain, Wire rope Mould base, Vertical storage
Drilling and & Grab hoists, Transmission Plastic moulding solutions
Products Machined castings
milling machines Crane kits, Pallet & housing tools, Dies, Sheet (V-Store), Roll-
for GIS
among other trucks and Light components metal casing and form products
SPMs crane systems Housings and Automated
Storage and
Retrieval Systems

Process Power
Automotive Elevators Engineering FMCG
Industries Transmission

Automotive Metro Automotive E-commerce

Compressors
Food &
Applications Foundries & Printing
Beverages
Machines

Automotive Logistics

Steel Rolling
Pharmaceuticals
Mills

Electronics

Industrial Engineering
(₹ mn) FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E
Revenues 3,300 3,920 4,940 5,160 4,050 5,001 7,126 7,482 8,081 8,808
Growth (%) 0.0% 18.8% 26.0% 4.5% -21.5% 23.5% 42.5% 5.0% 8.0% 9.0%
EBIT 291 169 451 737 610 378 623 681 808 969
Margins % 8.8% 4.3% 9.1% 14.3% 15.1% 7.6% 10.8% 9.1% 10.0% 11.0%
Source: LKP Research

LKP Research 16
 CRAFTSMAN AUTOMATION LIMITED

Capex
Capex Guidance for FY24 at ₹4.8 bn (out of which ₹2.6 bn was spend in H1) includes capex of
₹1.5-1.6 bn towards a Greenfield plant at Coimbatore which would commence from FY 26.
Incremental Greenfield capex will be ₹1 bn in FY 26. The company is expecting to house all the
segments – mainly powertrain and aluminium products and some backward integration.
Robust Financials
Company’s robust financial performance positions them for future growth and diversification.
With CAL’s revenues having grown at a CAGR of 26% in between FY20-23, its PAT has grown by
77% in the same period, EBITDA margin had stayed between 23-26%, which is one of the best
across its peer group. The company has already incurred significant capital expenditure in the
last 4-5 years, including setting up an entire range of facilities such as no-bake sand foundry,
high pressure, low pressure and gravity die casting capabilities for production of various types
of aluminum castings for different applications for their customers, allowing them to offer a
diverse product suite, reduce operating costs and drive their productivity. In the coming years
we believe all the three segments of Craftsman will be driven strongly by growth drivers. PT
segment shall grow steadily. In the Aluminum Products segment, new orders mainly from the
PVs and in the storage sub-segment within the industrial segment shall lead to a very healthy
topline growth. Additonally, the consolidated numbers shall get a strong fillip from the DR
Axion business which has been consistently reporting 18%+ margins for the last two quarters.
We therefore expect a CAGR of 12%/14%/20% for revenues/EBITDA/PAT in the period between
FY23-26E.

The increased capex guidance and debt raised for acquisition may result into some pressure
on the financials in the short term. However, robust cash generation stemming from strong
operational performance shall lead to comfortable financial leverage. Improvement in FCF and
return ratios in line with strong operational efficiencies along with track record of creating and
gaining market leadership organically is uncommon in the auto component industry.

Revenue Vs Revenue Growth EBITDA Vs EBITDA Margin

Revenues (Rs mn) % growth EBITDA (Rs mn) % margins

43.4% 43.6% 43.9% 28.1% 13,159

26.4%
58,959 24.1%
22.9% 11,058
51,920 22.3%
21.5% 20.6%
25.2% 9,436 21.3%
20.4% 45,808 18.7%

13.3% 13.6%
4.2% 6,836
31,826
5,342
22,170 4,138 3,910 4,340
18,096 14,834
15,033 -18.0% 15,463 2,750

FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E

Source: Company, LKP Research

LKP Research 17
 CRAFTSMAN AUTOMATION LIMITED

PAT Vs PAT Margin Net debt Vs Net Debt/Equity (x)

PAT (Rs mn) % margins Net debt (Rs mn) Net Debt/Equity (x)

10.4% 13,099
124.7% 12,499
6,127 118.2%
113.9% 11,899
11,399
9.2%
8.4%
7.9% 4,752
7.4% 9,126
8,282 79.3%
3,852
5.9% 7,024 66.7%
5.2% 59.3%
5,797 56.5% 47.4%
2,510 5,188

2.9% 1,641
2.2% 45.7%
942 909
321 424

FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E

Source: Company, LKP Research

Return Ratios Trend Cash flows

ROE (%) RoCE (%) OCF (Rs mn) FCF (Rs mn)
23.4%
21.7% 22.2%
6,875
6,531
19.3% 6,076 6,225
21.6% 22.2%
17.8% 18.0% 21.5%

15.3% 4,225
17.5% 3,980
12.9% 12.6% 3,502 3,272
14.4% 3,054 2,875
2,713 2,579
13.4%
1,677 1,631
1,183
9.3%
504

5.2% 5.8%
-178
-1,003
FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E
FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E

Source: Company, LKP Research

Risks
CV cycle downturn: Currently the CV cycle is moving at a slow pace considering high base
and ending of the three year CV cycle. CAL’s PT business is dependent on the CV industry,
which poses a risk to our assumptions. However, we believe that continued activities in the
infrastructure of the country, real estate picking up at a good pace, we believe this risk shall be
mitigated.
Deficit monsoon and unseasonal rains: India received below than average monsoon in 2023
(94.4%) which may impact agriculture. Secondly in November, certain states like Maharashtra,
Gujarat, Rajasthan and MP received heavy unseasonal rains which impacted the overall crop
harvesting and thus may have an impact on the sale of tractors. This would again have a bearing
on the PT business.
Low growth in EV proliferation may cause Aluminium products business to go in slow lane:
Aluminium being the favorite metal for light-weightedness,the current EV transition is finding
good demand for this metal, which CAL is using in its division. If there is a disruption caused by
any new technology or offtake of EV products get impacted by cost, infrastructure or any such
reason, then we may see this division of CAL getting impacted negatively.

LKP Research 18
CRAFTSMAN AUTOMATION LIMITED

Outlook & Valuation

We believe the Power train business will be driven by expected pick up in Replacement cycle
for HCVs in the medium term and also fresh demand rising by movement in the investment
capex cycle of the country. Dieselization demand from all over the world and localization of
diesel vehicle demand should lead to strong demand for Power trains. Rising infrastructure
growth, construction, mining, agri-commodities transportation, increasing freight rates etc will
all lead to a very strong growth in the CV industry. However, the real demand growth may
come in FY 26 only as FY 24 and FY 25 may see soft growth on high base of FY 23. New order
from a global CV player also should aid growth in FY 26. Exports business (now 10% of topline)
and electrification shall drive the Automotive Aluminum business. New orders from Stelantis
shall provide the required fillip from H2 of FY25. Pick up in 2Ws and EVs should augur well
for Aluminium business which is currently in ramp up stage. Both Storage and non- storage
businesses shall lead to a strong growth in the Industrial Engg business in H2. DR Axion
acquisition seems to be a strategic/synergic fit which is 30% of topline and is giving boost to
the consolidated business. The increased capex guidance and debt raised for acquisition may
result into some pressure on the financials in the short term. However, robust cash generation
stemming from strong operational performance shall lead to comfortable financial leverage.
Improvement in FCF and return ratios in line with strong operational efficiencies along with
track record of creating and gaining market leadership organically is uncommon in the auto
component industry. We estimate the consolidated revenues/EBITDA/PAT to grow at a CAGR
of 23%/24%/35% in the period between FY23- 26E. We therefore value CAL at 21x rolled over
earnings of FY26E (currently trades at 17.7x). Maintain BUY with a target of ₹6,098.

LKP Research 19
 CRAFTSMAN AUTOMATION LIMITED

Income Statement Balance Sheet

(₹ mn) FY 23 FY 24E FY 25E FY 26E (₹ mn) FY 23 FY 24E FY 25E FY 26E
Total Revenues 31,826 45,808 51,920 58,959 Equity and Liabilities
Raw Material Cost 16,294 24,453 27,620 30,847 Equity Share Capital 106 106 106 106
Employee Cost 2,335 3,010 3,248 3,675 Reserves & Surplus 13,663 17,130 21,407 26,922
Other Exp 6,361 8,908 9,994 11,278 Total Networth 14,379 17,846 22,123 27,638
EBITDA 6,836 9,436 11,058 13,159 Total debt 9,062 9,562 10,162 10,762
EBITDA Margin(%) 21.5% 20.6% 21.3% 22.3% Deferred tax assets/liabilities 1,411 1,711 2,011 2,311
Depreciation 2,216 2,933 3,278 3,440 Other curent liabilities 792 792 792 792
EBIT 4,620 6,503 7,780 9,720 Total non-current liab and provs 11,265 12,065 12,965 13,865
EBIT Margin(%) 14.5% 14.2% 15.0% 16.5% Current Liabilities
Other Income 125 165 200 225 Trade payables 7,116 7,530 7,824 8,077
Interest 1202 1634 1851 2036 Short term provisions+ borrowings 2,721 2,721 2,721 2,721
Other current liabilities 2,587 2,587 2,587 2,587
PBT 3,548 5,034 6,129 7,909
Total current liab and provs 12,424 12,837 13,131 13,384
PBT Margin(%) 11.1% 11.0% 11.8% 13.4%
Total Equity & Liabilities 38,067 42,748 48,219 54,886
Tax 1,038 1,182 1,377 1,781
Assets
Adjusted PAT 2,510 3,852 4,752 6,127
Net block 18,388 20,255 20,477 18,537
APAT Margins (%) 7.9% 8.4% 9.2% 10.4%
Capital WIP 966 1,066 1,566 2,066
Exceptional items 0 0 0 0
Other non current assets 3,833 3,833 3,833 3,833
PAT 2,510 3,852 4,752 6,127
Total fixed assets 23,187 25,154 25,877 24,437
PAT Margins (%) 7.9% 8.4% 9.2% 10.4%
Cash and cash equivalents 273 384 1,533 3,709
Other bank balance 200 200 200 200
Key Ratios Inventories 8,360 10,668 12,802 16,153
YE Mar FY 23 FY 24E FY 25E FY 26E Trade receivables 5,353 5,648 7,112 9,692
Per Share Data (Rs) Other current assets 693 693 693 693
Adj. EPS 118.9 182.6 225.2 290.4 Total current Assets 14,879 17,591 22,340 30,447
CEPS 224.0 321.6 380.6 453.4 Total Assets 38,067 42,748 48,219 54,886
BVPS 681.5 845.8 1048.5 1309.8
DPS 3.8 18.3 22.5 29.0 Cash Flow
Growth Ratios(%)
(₹ mn) FY 23 FY 24E FY 25E FY 26E
Total revenues 43.6% 43.9% 13.3% 13.6%
PBT 3,548 5,034 6,129 7,909
EBITDA 28.0% 38.0% 17.2% 19.0%
Depreciation 2,216 2,933 3,278 3,440
EBIT 40.8% 40.8% 19.6% 24.9%
Interest 1,062 1,634 1,851 2,036
PAT 52.9% 53.5% 23.4% 28.9%
Chng in working capital 100 -1,888 -3,006 -5,378
Valuation Ratios (X)
Tax paid -727 -1,182 -1,377 -1,781
PE 43.2 28.2 22.8 17.7
Other operating activities 0 0 0 0
P/CEPS 23.0 16.0 13.5 11.3
Cash flow from operations (a) 6,076 6,531 6,875 6,225
P/BV 7.5 6.1 4.9 3.9
Capital expenditure -3,453 -4,900 -4,000 -2,000
EV/Sales 3.8 2.6 2.3 2.0 Chng in investments 2 0 0 0
EV/EBITDA 17.5 12.7 10.8 9.0 Other investing activities -3,628 0 0 0
Operating Ratios (Days) Cash flow from investing (b) -7,079 -4,900 -4,000 -2,000
Inventory days 95.9 85.0 90.0 100.0 Free cash flow (a+b) -1,003 1,631 2,875 4,225
Recievable Days 61.4 45.0 50.0 60.0 Inc/dec in borrowings 2,042 500 600 600
Payables day 29.7 60.0 55.0 50.0 Dividend paid (incl. tax) -79 -385 -475 -613
Net Debt/Equity (x) 0.79 0.67 0.56 0.47 Interest paid -1,027 -1,634 -1,851 -2,036
Profitability Ratios (%) Other financing activities -205 0 0 0
ROCE 18.0% 21.7% 22.2% 23.4% Proceeds from issue of equity shares 0 0 0 0
ROE 17.5% 21.6% 21.5% 22.2% Cash flow from financing (c) 730 -1,519 -1,726 -2,049
Dividend payout ratio (%) 3.2% 10.0% 10.0% 10.0% Net chng in cash (a+b+c) -273 111 1,149 2,177
Dividend yield(%) 0.1 0.4 0.4 0.6 Closing cash & cash equivalents 272 384 1,533 3,709

LKP Research 20
 ENDURANCE TECHNOLOGIES LIMITED
Justifies premium valuations

Endurance Technologies (Endu), a conglomerate manufacturing suspension products, alloy

Rating BUY
wheels, brakes, ABS etc supplying majorly to 2Ws and PVs domestically and globally. We
believe the company will continue to outperform the industry led by (1) Improvement in 2W Current Market Price (₹) 1,893

demand in H2 FY24 and FY25 (after two weak years), and thereon led by strong underlying 12M Price Target (₹) 2,124
trends for scooterization and premiumization (2) addition of new and value added products Potential upside (%) 12
(ABS supply ramp-up over FY23 aided by valves business, drive-shafts for Bajaj including
LCVs and 3Ws, entry into crankshaft business, non-automotive castings, alloy wheels,
Stock Data
disc brakes, suspensions - front and inverted forks etc.), (3) ramp-up in EV products (EV
Sector : Auto Components
order book of ~₹6bn excl. Maxwell) and (4) increasing share of after markets and exports
FV (₹) : 10
(though temporarily subdued). Furthermore, ABS supplies should ramp-up leading to higher
Total Market Cap (₹ bn) : 267
revenues for the company. In India, rising order book should take care of some pressure
Free Float Market Cap (₹ bn) : 67
seen in the EU operations including chip shortage there, higher power costs (though they
are reduced now), recession and other supply chain issues. 52-Week High / Low (₹) : 1,948 / 1,179
12M Avg. Dly Traded Volume (in lakh) 0.96
However, with the main inhibitor of profitable growth in EU; the energy costs which are
BSE Code / NSE Symbol ENDURANCE / 540153
softening from Q3, we anticipate surge in margins there as well. The array of acquisitions
Bloomberg : ENDU IN
in Europe should spice up the business there. Higher operating leverage stemming from
higher demand from 2Ws should lead to better margin performance. The strength in Endu’s
business franchisee and experienced management should help the stock to continue Shareholding Pattern
commanding premium valuation multiples in comparison to most domestic auto ancillary (%) Sep-23 Jun-23 Mar-23 Dec-22
companies. In the latter, there are only a handful of high-quality, large-scale, multi-product Promoter 75.00 75.00 75.00 75.00
auto component suppliers. Considering Endu’s size and strong market share (leadership FPIs 8.31 7.34 7.65 7.65
position in some segments) in its operating segments, the stock should command a premium MFs 8.75 9.00 9.44 9.40
to its domestic peers. We maintain our BUY rating FY26E target price of ₹2,124 (valued @ Insurance 5.99 6.72 6.08 6.08
27x multiple). Currently the stock is trading at 24x multiple FY26E earnings. Others 1.95 1.94 1.83 1.87
Orders wins boost domestic performance Source: BSE

Endu has won several orders during last year and has also received RFQs worth ₹19 bn from
various OEMs in India and abroad. On the EV front, Endu has secured orders from Bajaj Price Performance
Auto, Aether Energy, Hero Electric, Mahindra Electric, TVS, Tata Motors, Ampere, Okinawa (%) 1M 3M 6M 12M
and Bounce. The order wins from EV segment had reduced in Q1 as FAME-2 subsidy got
Endurance 12.7% 20.1% 18.3% 37.0%
withdrawn from July 23. But in Q2 they are back on track.
Nifty 50 6.2% 10.2% 11.4% 18.0%

Key Financials FY 23 FY 24E FY 25E FY 26E * To date / current date : January 3, 2024

Total sales (₹ bn) 88.0 100.0 115.0 128.0

EBITDA margins (%) 11.8% 12.9% 13.5% 14.1% Endurance vs Nifty 50
PAT margins (%) 5.4% 6.6% 7.3% 7.8%
160
EPS (₹) 34.8 46.9 59.5 70.8
140
P/E (x) 55.5 40.3 31.8 26.7 120
P/BV (x) 6.0 5.4 4.7 4.1 100
80
EV/EBITDA (x) 25.7 20.6 16.8 14.3
60
ROE (%) 10.9% 13.3% 14.9% 15.4%
40
ROCE (%) 12.6% 15.3% 17.2% 18.0% 20 Endurance Technologies NIFTY 50
0
Jan-23 Apr-23 Jul-23 Sep-23 Dec-23

LKP Research 21
ENDURANCE TECHNOLOGIES LIMITED

The company has now become a major player in supply of ABS assembly and as a value added
product, Endu has started manufacturing Valves for ABS from March 23 which is considered
to be a high margin business. Endu has started supplies of a new product - Driveshafts at their
Waluj plant for OEMs such as M&M, TVS and Bajaj Auto after the commercial production
commenced in July 2022. Endu is expanding its Alloy wheels capacity to supply Bajaj Auto,
Yamaha, TVS and Hero Electric. Furthermore, in order to supply Disc Brake assemblies to HMSI
new business, Endu has started their second plant at Waluj, Aurangabad. The company has
also ramped up its production to supply inverted front forks to KTM, HMSI, HMCL and Honda
2-wheelers. The company has won big order from Hyundai Kia to supply castings for which the
production is ramped up at their Vallam plant. Such a strong portfolio of orders and products
will surely ensure strong growth visibility for the company in ensuing years.
European business to recover gradually
European business has been facing some pressure there due to hike in energy prices. But since
the governments over there have shared this burden partially and the prices have gone down,
some relief is seen there. In Europe, the company won several orders for hybrid technology, EV
and ICE as well from Daimler, VW etc. Slowdown in Europe and certain regulatory hurdles led
to tapering of EV order wins and slowdown in EV business during H1 FY24, however we expect
a recovery in these sales going into FY 25.
Maxwell to grow well on EV demand
Maxwell, the biggest acquisition of Endu, reported ₹170 mn of topline in Q2 and ₹43 mn
of EBITDA losses from ₹61 mn of losses yoy. Its order book in the 2.5 years is ₹3.7 bn. This
company has already commenced supply to several big players like Hero Motocorp, while for
Ampere production shall start from Q4 FY 24. It has also received LOI from other players as well.
With a good order flow, we expect the company to reduce losses in the next 1-2 quarters and
report profitable growth.

LKP Research 22
ENDURANCE TECHNOLOGIES LIMITED

Company Profile
Key Business Segments
Endurance is a Tier-1 supplier to the 2-wheeler, 3-wheeler and 4-wheeler segments. It supplies
in four main categories of 1). Aluminium die-casting and machining 2). Suspension components
like shock absorbers and front forks 3). Transmission components such as clutch assemblies,
friction plates & continuous variable transmission systems 4). Braking components such as disc
& drum brake assemblies, rotary discs and brake pads. As far as regional mix is concerned, 77%
of the topline in FY 23 came from domestic business, while 23% came in from Europe.

Endurance mainly caters to 2-wheeler and 3-wheeler OEMs in India. In Europe, their key
customers are 4-wheeler OEMs. The company earned 55% of the consolidated revenue
from motorcycles, 8% from scooters, 8% from 3-wheelers, 27% from 4Ws and 2% from other
segments in H1 FY24. Motorcycles contributed 70%, scooters 10%, 3-wheelers contributed 11%,
4-wheelers contributed 7% and others 3% to the standalone revenue in Hi FY24. The company
derives the bulk of its business from Bajaj Auto (38%), HMSI (8%), VW-Audi-Porche (7.7%) and
Stellantis (5.7%) among other players. Consolidated basis. The company derived ~70% of the
revenue from top 6 customers in H1 FY24. Other key customers include Royal Enfield, Piaggio,
HMCL, TVS and Yamaha India.
Manufacturing Plants
Endurance has built up its plants around its clients plants. Endurance started manufacturing
of aluminium castings in Aurangabad, India in 1986. Today, it has 16 manufacturing plants in
India and nine manufacturing plants in Europe. Out of the 16 plants, 11 plants are located in
Maharashtra, two in Uttarakhand, two in Gujarat and one in Tamil Nadu. Out of the nine plants
in Europe, three are located in Germany and six are located in Italy. It also has four research
and development centers in India located in Maharashtra. Aurangabad and Pune plants supply
to most of the domestic customers and they export to Getrag Ford transmission, Fiat Chrysler,
Renault PSA and Piaggio. Sanand facility caters to Honda Motors and Scooter India. Chennai
facility caters to Hyundai Motor India and Royal Enfield.
Business Divisions
The company has four divisions as such – 1). Aluminium die-casting and machining – Key
products in this segment include cylinder heads & head covers, crank cases, cylinder blocks,
transmission covers, swing arms, rear arms, alloy wheels, handle bars, fly wheel side covers,
case transaxles, clutch housings, gear box housings, cam carriers etc. for 2-wheelers, 3-wheelers
and 4-wheeler . In this business, Endurance is the market leader 2). Transmission Key products
in this segment include clutch assemblies and friction plates for 100cc to 500cc motorcycles,
3-wheelers, small commercial vehicles and quadricycles. They also make CVTs and friction
plates for 110 cc scooters. Japan based companies FCC and XAD are its closest competitors in
this business. 3). SuspensionKey products in this segment include shock absorbers for all 2Ws
including motorcycles and scooters, 3W and quadricycles. They also make front forks for 100cc
to 500cc motorcycles. In this business, Endurance is the market leader with tough competition
from the likes of Munjal Showa and Gabriel India. 4). Braking systems – Key products in this
segment include rotary discs, disc and brake pads to 125cc to 500cc motorcycles. They also
make tandem master cylinder sub-assemblies, asbestos free brake shoes and drum brake
assemblies for 3-wheelers. Italy based Brembo and Japan based Nissin are its competitors in
this business segment include rotary discs, disc and brake pads to 125cc to 500cc motorcycles.
They also make tandem master cylinder sub-assemblies, asbestos free brake shoes and drum
brake assemblies for 3-wheelers. Italy based Brembo and Japan based Nissin are its competitors
in this business. They also make ABS and CBS for two wheelers.

LKP Research 23
 ENDURANCE TECHNOLOGIES LIMITED

Products

Source: Company, LKP Research

Key Customers
Share in Total Income H1 FY24 H1 FY23
Bajaj Auto Ltd 38.4% 38.9%
Honda MC & Scooters 7.9% 10.9%
VW-Audi-Porsche 7.7% 6.5%
Stellantis 5.7% 5.6%
Royal Enfield India 5.5% 6.2%
India Yamaha Motors 4.0% 4.7%
Hero Motorcorp 3.2% 3.2%
TVS Motors 2.6% 0.9%
Mercedes 2.5% 3.0%
Hyundai/ Kia 2.0% 1.8%
Tata Motors 1.5% 1.5%
Source: Company, LKP Research

LKP Research 24
 ENDURANCE TECHNOLOGIES LIMITED

Consolidated Total Income

By Entity - H1FY’24 By Entity - H1FY’23

Europe
Europe 21.3%
23.4%

India
75.9% Maxwell
India 0.1%
Maxwell
0.7% 78.6%

Source: Company, LKP Research

By Products - H1FY’24 By Products - H1FY’23

Transmission Others Transmission Others
4.6% 3.5% 4.9% 2.7%

After Market After Market

5.2% 4.7%

Alloy Wheel Alloy Wheel

7.7% 7.1% Die Casting
Die Casting
43.4% 42.8%
Disc Brake
Disc Brake 9.1%
11.0%

Suspension Suspension
24.6% 28.7%

Source: Company, LKP Research

By Vehicles - H1FY’24 By Vehicles - H1FY’23

3 Wheeler Others 3 Wheeler Others
8.0% 2.3% 7.5% 1.5%

Scooter
Scooter
7.8%
8.2%

Motorcycle
Motorcycle
54.7%
4 Wheeler 57.7%
4 Wheeler 25.5%
26.8%

Source: Company, LKP Research

LKP Research 25
 ENDURANCE TECHNOLOGIES LIMITED

Standalone Total Income

By Products - H1FY’24 By Products - H1FY’23

After Market Others After Market Others
6% 2% 6% 2%
Transmission Transmission
5% 5%

Suspension
Alloy Wheel Alloy Wheel Suspension
33%
10% 9% 36%

Disc Brake
Disc Brake 12%
14%

Die Casting
30% Die Casting
30%

Source: Company, LKP Research

By Vehicle Type - H1FY’24 By Vehicle Type - H1FY’23

Others Others
4 Wheeler 3% 4 Wheeler 2%
7% 7%

Scooter Scooter
10% 10%

Motorcycle 3 Wheeler
3 Wheeler Motorcycle
70% 9%
10% 72%

Source: Company, LKP Research

Europe Business
Wide variety of products catering to strong clientele Endurance has adopted both organic and
inorganic strategy to expand its European business. The company has an SPV—Endurance
Overseas Srl in Italy for making strategic overseas investment and a subsidiary Endurance SpA
(including merged entity of Endurance Fondalmec Italy and Endurance FOC in January). The
company has also has a subsidiary, Endurance Amann GmbH, in Germany. They manufacture
aluminium die-casting and machining products. Key products in this segment include steel
wheel hubs, head axles, gear box housing, torque converter, machine cast iron exhaust manifold,
engine parts like cylinder heads & head cover, crank axles, etc. In Europe, the company has
acquired Maxwell which manufactures EV products to cater to the blooming EV market there.
Out of Euro 240mn of cumulative orders won in the last 5 years, Euro 90mn (37%) are for EV
applications and Euro 112mn (47%) for Hybrid Applications. ICE end-use comprised 45% of
Endurance Europe revenues in FY23, and are expected to reduce to 22% in FY27

LKP Research 26
ENDURANCE TECHNOLOGIES LIMITED

Investment Argument
India business – Robust order wins to boosts investor confidence
Endu has won several orders during H1 FY24 and has also received RFQs worth ₹19 bn from
various OEMs in India and abroad. ₹7.7 bn worth new orders were won in H1 FY24 excluding
orders from Bajaj Auto. Out of cumulative ₹36.64 bn (₹25.71 bn was the new business orders,
while ₹10.93 bn was replacement order), the company catered ₹4.4 bn in FY 23, while order
pipeline of ₹8.2 bn would be addressed in FY 24E and ₹10 bn would be completed in FY25E-26E.

Apart from this, the company has started work on new order worth ₹1.25 bn from HMSI in
H1FY24. The other major order wins mainly consist orders from Suzuki (front forks worth ₹1.4
bn in FY23 and ₹0.25 bn in H1FY24), New 4W order of ₹0.24bn for forging exports to JLR and
₹0.58 bn for castings to Punch Power Train. Endu has also supplied Aluminum die castings,
alloy wheels, suspensions and braking components for certain new launches in the premium
motorcycle segment. TVS suspension and alloy wheels order passed ₹5 bn this quarter, while
the latest orders from TVS are for IFF and monoshox worth ₹0.27 bn.

The total order wins by Endu in the EV space is ₹0.19 bn in H1FY24 from Bajaj Auto, Aether Energy,
Hero Electric, Mahindra Electric, TVS, Tata Motors, Ampere, Okinawa and Bounce. The order wins
from EV segment reduced this quarter as FAME-2 subsidy got withdrawn from July 23.

The company supplies ABS assemblies to Bajaj Auto & Royal Enfield and has reached peak production
of 400K this month, while with increasing demand, the company has taken it up to 600K units and
plans to take it at 1.2 mn units per annum by H2FY25. As a value added product, Endu has started
manufacturing Valves for ABS from March 23 which is considered to be a high margin business. Endu
has started supplies of a new product - Driveshafts at their Waluj plant for OEMs such as M&M,
TVS and Bajaj Auto after the commercial production commenced in July 2022. Endu is expanding
its Alloy wheels capacity from 4.5 mn units to 5.5 mn in April 2024 to supply Bajaj Auto, Yamaha,
TVS and Hero Electric. Furthermore, in order to supply Disc Brake assemblies to HMSI new business,
Endu has started their second plant at Waluj, Aurangabad. The company has also ramped up its
production to supply inverted front forks to KTM, HMSI, HMCL and Honda 2-wheelers. The company
has won an order worth ₹2.5 bn from Hyundai Kia to supply castings for which the production is
ramped up at their Vallam plant. Such a strong portfolio of orders and products will surely ensure
strong growth visibility for the company in ensuing years.

LKP Research 27
ENDURANCE TECHNOLOGIES LIMITED

Europe – EV proliferation remains key to growth

In Europe, the company won orders worth €20 mn during H1 FY24, and has won orders worth
€240 mn cumulative orders for last 5 years out of which 47% was for hybrid technology, while
37% was for EV and 16% for ICE. The H1 FY24 orders mainly came from VW for EV motor
cover. Slowdown in Europe and certain regulatory hurdles led to tapering of EV order wins and
slowdown in EV business during H1 FY24.

EU subsidiaries reported revenues of EUR63 mn (+10% yoy) mainly due to uptick in EU PV sales,
partly offset by lower realizations due to pass-through of softening energy costs. EBITDA margin
expanded by 320 bps on a yoy basis mainly led by lower electricity and gas prices and operating
leverage benefits. However, the company highlighted that volume recovery remains uncertain
for the next two quarters owing to inflationary pressures and high interest rates, post which the
company expects recovery in production volumes. Therefore we believe that FY 25 and FY 26
should be years of strong volume growth in EU.

In order to strengthen its continental business the company has added to its acquisition kitty a
company named from Italy New Fren Srl in November 2022, which is into brake discs, centrifugal
clutches, and brake shoes for 2Ws. Earlier in Q2 FY23, the company had acquired another Italian
company Frenotechnica which is into braking systems. This was preceded by Maxwell earlier
and Adler & Grimeca in FY22. These acquired companies should provide synergetic benefits in
Europe and contribute meaningfully to their market share and European financials

European car registration

(‘000) H1 FY24 H1 FY23 % Change
France 868 747 16.2%
Germany 1,471 1,242 18.4%
Italy 749 638 17.4%
Spain 474 436 8.7%
Others 1,728 1,481 16.7%
Total 5,290 4,544 16.4%
Source: Company, LKP Research

Maxwell losses reduce, strong potential to grow

Endurance completed the acquisition of 51% stake in Maxwell, a company which is into supplying
Battery packs and BMS to EV makers in Q2 FY23. Balance 49% shall be acquired in 5 tranches
over the next 5 years. Maxwell, the biggest acquisition of Endu, now contributes 0.7% of the
consolidated business and has great potential to rapidly increase its contribution. The company
reported ₹170 mn of topline in Q2 and ₹43 mn of EBITDA losses from ₹61 mn of losses yoy. This
is due to reduction in gas nd electricity prices in Europe and higher volumes. Its order book in
the 2.5 years is ₹3.7 bn. This company has already commenced supply to Hero Motocorp worth
₹1 bn. ₹0.5 bn orders are also won from Ampere whose production shall start from Q4 FY 24.
It has also received LOI from Hero Electric and Ampere worth ₹0.7 bn and ₹0.2 bn which are
expected to start work from Q4 FY24. With a good order flow, we expect the company to reduce
losses in the next 1-2 quarters and report profitable growth. Out of Euro 240mn of cumulative
orders won in the last 5 years, Euro 90mn (37%) are for EV applications and Euro 112mn (47%)
for Hybrid Applications. ICE end-use comprised 45% of Endurance Europe revenues in FY23,
and are expected to reduce to 22% in FY27.

LKP Research 28
ENDURANCE TECHNOLOGIES LIMITED

EV and Hybrid Share Increasing in Europe Business (Euro Million)

Source: Company, LKP Research

Risks
European slowdown - European economy is currently facing some slowdown, which may
impact demand there. Also the economy had been grappling with issues such as energy price
hikes leading to margin impact. However, with support from the central, most of the economies
have come out of this issue. Comeback of these uncertainties may lead to lower topline as well
as margin growth.

EV wave getting softened - EV wave has gathered momentum rapidly all over the globe.
OEMs as well as ancillary makers are investing heavily in this technology. However, there are
many challenges for the rapid penetration of EVs such as regulatory hurdles, lack of charging
infrastructure, pricing, profitability concerns on OEMs etc. Since Endurance derives considerable
(37%) of its order book from EVs, this risk can pose a matter of concern for the company.

2W sector in India - The 2W sector in India has gone through a dull period over the past couple
of years. In H1 FY 24, we have seen some recovery in it. However, the monsoons this year were
on the lower side. Also unseasonal rains in November in some major states caused destruction
of crops. Since 2Ws are dependent considerably on rural markets, a slowdown there can impact
the sector. Since Endurance derives 63% of its topline from 2Ws, this can be a major risk.

Over dependence on Bajaj Auto - Bajaj Auto contributed ~38% of total client base of Endurance.
Bajaj has been suffering from exports de-growth since last two years. This has also somewhat
impacted Endurance’s growth. Off late, we have seen reduction in negativity of volumes from
exports for the company. However, they are still not out of the woods. In case there are any
global issues leading to the developing markets once again, hen we may a dip in demand from
Bajaj Auto once again.

LKP Research 29
ENDURANCE TECHNOLOGIES LIMITED

Outlook and Valuation

We believe the company will continue to outperform the industry led by (1) Improvement in
2W demand in H2 FY24 and FY25 (after two weak years), and thereon led by strong underlying
trends for scooterization and premiumization (2) addition of new and value added products
(ABS supply ramp-up over FY23 aided by valves business, driveshafts for Bajaj including
LCVs and 3Ws, entry into crankshaft business, non-automotive castings, alloy wheels, disc
brakes, suspensions - front and inverted forks etc.), (3) ramp-up in EV products (EV order
book of ~₹6bn excl. Maxwell) and (4) increasing share of after markets and exports (though
temporarily subdued). Furthermore, ABS supplies should ramp-up leading to higher revenues
for the company. In India, rising order book should take care of some pressure seen in the EU
operations including chip shortage there, higher power costs (though they are reduced now),
recession and other supply chain issues. However, with the main inhibitor of profitable growth
in EU; the energy costs which are softening from Q3, we anticipate surge in margins there as
well. The array of acquisitions in Europe should spice up the business there. Higher operating
leverage stemming from higher demand from 2Ws should lead to better margin performance.
The strength in Endu’s business franchisee and experienced management should help the stock
to continue commanding premium valuation multiples in comparison to most domestic auto
ancillary companies. In the latter, there are only a handful of high-quality, large-scale, multi-
product auto component suppliers. Considering Endurance’s size and strong market share
(leadership position in some segments) in its operating segments, the stock should command
a premium to its domestic peers. We maintain our BUY rating FY26E target price of ₹2,124
(valued @ 27x multiple). Currently the stock is trading at 24x multiple FY26E earnings.

LKP Research 30
 ENDURANCE TECHNOLOGIES LIMITED

Financials (Consolidated)

Revenue Vs Revenue Growth EBITDA Vs EBITDA Margin

16.6% 16.3% 15.9%

15.3% 15.0%
13.5% 15.0%
12.7% 14.2% 14.1%
11.3% 11.3% 13.6% 13.5%
12.8% 12.9%
11.8%
6.7%

-5.4%
-7.9%
114,966

128,003

11,288

11,308

10,404

10,362

12,861

15,545

17,996
59,912

66,660

75,104

69,177

65,470

75,491

88,040

99,959

7,583

9,277

9,646
FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E

Revenues (Rs mn) Growth (%) EBITDA (Rs mn) Margins (%)

Source: Company, LKP Research

PAT Vs PAT Margin Net debt Vs Net Debt/Equity

8.2% 8.1% 1,223

7.8%
7.3%
6.6% 6.5% 6.6% 0.07
5.9% 6.0% -96
5.6% -1,163
-1,224
-1,584
-1,915 -2,189 -2,087
0.00
-0.02 -4,357
-0.04
-0.06 -0.05
-0.07 -0.07 -0.08
3,303

3,907

4,951

5,657

5,310

4,922

4,899

6,600

8,376

9,958

-8,534
-0.13
FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E

PAT (Rs mn) Margins (%) Net Debt (Rs mn) Net Debt/Equity (x)

Source: Company, LKP Research

Return Ratios Trend Cash flows

ROE (%) ROCE (%)

13,634
12,832
25.1%
23.5% 10,819
22.4% 10,113
20.4% 8,983 8,619
18.0% 7,420 7,416
17.2%
20.1% 15.9% 6,215 6,334
19.1% 19.2% 18.8% 15.3% 5,371
13.9% 5,032
12.6%
14.9% 15.4% 3,069 3,406
14.6% 2,519
13.3% 1,764 1,903
1,733
11.8%
10.9% 309

(527)
FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E
FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E
CFO (Rs mn) FCF (Rs mn)

Source: Company, LKP Research

LKP Research 31
 ENDURANCE TECHNOLOGIES LIMITED

Income Statement Balance Sheet

(₹ mn) FY 23 FY 24E FY 25E FY 26E (₹ mn) FY 23 FY 24E FY 25E FY 26E
Total Revenues 88,040 99,959 114,966 128,003 Equity and Liabilities
Raw Material Cost 53,295 59,924 68,831 76,424 Equity Share Capital 1,407 1,407 1,407 1,407
Employee Cost 7,636 8,371 9,305 10,124 Reserves & Surplus 42,715 48,107 54,950 63,086
Other Exp 16,747 18,803 21,286 23,459 Total Networth 44,121 49,513 56,357 64,492
EBITDA 10,362 12,861 15,545 17,996 Total debt 2,781 3,281 3,781 4,281
EBITDA Margin(%) 11.8% 12.9% 13.5% 14.1% Net Deferred Tax 5 5 5 5
Other Income 455 630 720 790 Long term provisions 1,809 1,809 1,809 1,809
Depreciation 4,216 4,533 4,888 5,259 Current Liab & Prov
EBIT 6,146 8,328 10,656 12,737 Trade payables 14,257 15,610 17,324 18,587
EBIT Margin(%) 7.0% 8.3% 9.3% 10.0% Short term provisions 1,149 1,149 1,149 1,149
Interest 206 245 305 335 Other current liabilities 3,901 3,901 3,901 3,901
PBT 6,395 8,713 11,071 13,192 Total current liab and privs 19,307 20,660 22,374 23,637
PBT Margin(%) 7.3% 8.7% 9.6% 10.3% Total Equity & Liabilities 68,024 75,269 84,326 94,224
Tax 1,497 2,113 2,696 3,234 Assets
PAT 4,899 6,600 8,376 9,958 Net block 26,347 29,814 31,814 33,814
PAT Margins (%) 5.6% 6.6% 7.3% 7.8% Capital WIP 1,684 1,984 2,284 2,584
Exceptional items 103 0 0 0 Other non current assets 2,968 2,968 2,968 2,968
Adj PAT 4,796 6,600 8,376 9,958 Total fixed assets 36,106 39,874 42,174 44,474
Adj PAT Margins (%) 5.4% 6.6% 7.3% 7.8% Cash and Bank 2,877 4,444 8,138 12,815
Inventories 8,206 8,865 9,995 10,888
Trade receivables 11,620 12,871 14,804 16,833
Key Ratios Loan, Advances & others 2,751 2,751 2,751 2,751
YE Mar FY 23 FY 24E FY 25E FY 26E Other current assets 6,464 6,464 6,464 6,464
Per Share Data (Rs) Total current Assets 31,918 35,395 42,151 49,751
Adj. EPS 34.8 46.9 59.5 70.8 Total Assets 68,024 75,269 84,326 94,224
CEPS 64.1 79.1 94.3 108.2
BVPS 313.7 352.0 400.7 458.5
DPS 6.2 8.6 10.9 13.0 Cash Flow
Growth Ratios(%) (₹ mn) FY 23 FY 24E FY 25E FY 26E
Total revenues 16.6% 13.5% 15.0% 11.3% PBT 6,293 8,713 11,071 13,192
EBITDA 7.4% 24.1% 20.9% 15.8% Depreciation 4,216 4,533 4,888 5,259
PAT -0.5% 34.7% 26.9% 18.9% Interest 196 245 305 335
EPS Growth -0.5% 34.7% 26.9% 18.9% Chng in working capital (413) (558) (1,348) (1,659)
Valuation Ratios (X) Tax paid (1,849) (2,113) (2,696) (3,234)
PE 55.5 40.3 31.8 26.7 Other operating activities 0 0 0 0
P/CEPS 29.5 23.9 20.1 17.5 Cash flow from operations (a) 8,619 10,819 12,832 13,634
P/BV 6.0 5.4 4.7 4.1 Capital expenditure (6,362) (8,300) (7,800) (7,300)
EV/Sales 3.0 2.7 2.3 2.0 Chng in investments 0 0 0 0
EV/EBITDA 25.7 20.6 16.8 14.3 Other investing activities 21 0 0 0
Operating Ratios (Days) Cash flow from investing (b) (9,146) (8,300) (7,800) (7,300)
Inventory days 56.2 54.0 53.0 52.0 Free cash flow (a+b) (527) 2,519 5,032 6,334
Recievable Days 48.2 47.0 47.0 48.0 Inc/dec in borrowings 282 500 500 500
Payables day 59.1 57.0 55.0 53.0 Dividend paid (incl. tax) (879) (1,208) (1,533) (1,822)
Net Debt/Equity (x) 0.06 0.07 0.07 0.07 Interest paid (40) (245) (305) (335)
Profitability Ratios (%) Cash flow from financing (c) (1,150) 1,567 3,694 4,677
ROCE 12.6% 15.3% 17.2% 18.0% Net chng in cash (a+b+c) 4,027 2,877 4,444 8,138
ROE 10.9% 13.3% 14.9% 15.4% Closing cash & cash equivalents 2,877 4,444 8,138 12,815
Dividend payout 18.3% 18.3% 18.3% 18.3%

LKP Research 32
 SONA BLW PRECISION FORGINGS LIMITED
....proxy play on EV transition

Sona BLW Precision Forgings (Sona) is a multi-product, multi geography auto ancillary
Rating BUY
company which is into manufacturing products like differential gears (32% of revenue),
differential assemblies (23%), starter motors for hybrids and ICE (21% and 15%, respectively), Current Market Price (₹) 640
traction motors for two-wheeler electric vehicles (4%) and others (5%). Exports account for 12 M Price Target (₹) 707
71%, with the U.S. and Europe being the largest markets (43% and 20% of total exports, Potential upside (%) 11
respectively). Strong margin profile, high and increasing return ratios, warm/cold forgings
technical benefit and entry barriers to it and EV opportunity provides the moat for the
company considering 78% of the current order book of ₹221 bn belongs to EV. We believe Stock Data
that the rapidly growing penetration of EVs and Sona being well entrenched into it, is riding Sector : Auto Components
the EV wave seen globally. The company is performing well in its traditional business of FV (₹) : 10
Differentials and is also gaining traction in other products like EDL and ADAS (through recent
Total Market Cap (₹ bn) : 374
Novelic acquisition). Though the starter motors business is waning due to ICE dependence,
Free Float Market Cap (₹ bn) : 261
EV business is more than offsetting this fall.
52-Week High / Low (₹) : 658 / 401
Sona is set to benefit from the electrification of light vehicles aided by its presence in both 12M Avg. Dly Traded Volume (in lakh) 27
driveline and motors. Capex plan is ₹11bn over the next three years. Currently, no customer
BSE Code / NSE Symbol : 543300 / SONACOMS
accounts for more than 20% of revenues, which the company hopes to bring to 15% over
Bloomberg : SONACOMS: IN
time. Sona has several EV products on its roadmap, which give strong growth visibility
without assuming any market growth. Production Linked Incentive (PLI) benefit may flow
through from FY25 onwards after products are approved in FY24. The addition of yet another Shareholding Pattern
EV product this quarter reinforces our view that the addressable market for Sona will keep (%) Sep-23 Jun-23 Mar-23 Dec-22
expanding, and hence it should trade at premium valuations. We anticipate a revenue/PAT Promoter 29.76 29.76 33.00 33.03
CAGR of ~20%/32% respectively each through FY22-FY26E, with strong returns ratios – RoE
Blackstone - - - 20.50
of ~23% in FY26E. Currently trading at ~41xFY26E EPS, we assign a BUY rating with a TP of
MFs 23.14 24.08 27.03 21.78
₹707.Blackstone’s recent exit eliminates the overhang of a large supply of shares, while we
FPIs 33.35 31.68 24.69 11.27
are aware that the management is professionally run.
Insurance 3.33 3.03 3.29 1.93
New business wins and expanding portfolio put Sona on a strong footing
Others 10.42 11.45 11.99 11.49
Company added ₹6bn of new orders, taking order book to ₹221 bn, where 78% of the order
Source: BSE
book is for EVs. It got 2 new order wins in the quarter: 1.) ₹1.7bn from a new age e-PV player
in North America for supplying Rotor Embedded Differential Sub-Assembly, production
commencement from Q2 FY25 2.) ₹3.7bn from established Indian OEM for supplying Mid- Price Performance
Drive Traction Motor for its e-3W, production commencement from Q3 FY25. While small (%) 1M 3M 6M 1YR
in quantum, these orders underscore Sona’s expanding product capability.
Sona 13.5% 9.0% 23.9% 53.6%
Nifty 50 6.2% 10.2% 11.4% 18.0%
Key Financials FY 23 FY 24E FY 25E FY 26E
* To date / current date : January 3, 2024
Total Sales (₹ bn) 27 33 40 46

EBITDA margins (%) 25.4% 28.5% 29.5% 30.4%

Sona vs Nifty 50
PAT margins (%) 14.9% 18.0% 18.9% 19.8%

EPS (₹) 6.8 10.3 13.1 15.6 180

160
P/E (x) 93.8 62.3 48.8 41.1 140
120
P/BV (x) 16.3 13.8 11.5 9.6
100
EV/EBITDA (x) 55.6 39.5 31.3 26.4 80
60
ROE (%) 17.4% 22.1% 23.6% 23.4% 40
20 Sona NIFTY 50
ROCE (%) 19.8% 25.6% 27.3% 27.1%
0
Total debt/equity (x) 0.10 0.09 0.09 0.08 Jan-23 Apr-23 Jul-23 Oct-23 Jan-24

LKP Research 33
SONA BLW PRECISION FORGINGS LIMITED

The company earns not more than 20% from a single client, while its top 10 clients contribute
to 80% of its topline. Company is planning to reduce this contribution by winning new such
clients, products and programs.

Sona emphasized its expanding focus to address the evolving trends in mobility: electric,
personalized, intelligent and connected. The company added several new components to its
future product roadmap: lightweight differentials, robotic gears, integrated motor controllers,
non-auto mobility motors, and sensors for in-cabin, short-range and zone monitoring. Sona’s
net order book was flat qoq at ₹221bn, 6.4x FY24E revenues. Including the effect of orders
already flowing into revenues, we estimate that Sona’s revenue potential has risen 5% QoQ and
45% in the last 8 quarters.
Underlying segmental drivers remain intact
Management indicated growth continues in most markets; PV segment has been good while
CV and Off Highway segments reported slightly lower growth. With slurry of new launches in
PVs across the world and higher electrification, PV segment shall remain strong and should
benefit Sona as PVs contribute about 63% of its current order-book and 70% of its topline in
H2 FY24. Higher electrification and premiumization shall increase the number of DAs and DGs
(driveline products) in vehicles, thus bolstering content per vehicle. Traction motor sales have
bounced back from Q1 lows on the back of regulations. Sona is expanding capacity (by end of
FY25) of EV traction motors at Chennai plant from 400,000 units currently to 600,000 units, and
setting up PCB assembly for 500,000 units as the company has high hopes from Traction Motors
demand considering low penetration of EVs in Indian 2W market (5%) and rising preference for
EV 2Ws in India. Starter motors are eventually expected to zero down as per management on
ICE dependence, but its timeline is uncertain.
Starter motor shrinkage can get offset by fast growing traction motors
As demand for starter motors dwindles (36% of revenue in FY23 vs. 56% in FY20) with the
rise of EVs, Sona is de-risking its operations by focusing on traction motors (BLDC+PMSM)
across EV categories. Sona has already established itself in the low power segment (<15KW),
primarily targeting 2Ws/3Ws in India, and is looking to expand into higher power categories
in the coming years. Additionally, Sona has three technological arrangements to explore new
motor technologies such as SRM (switch reluctance motors), magnetless and electrostatic drive
motors. Sona’s acquisition of Novelic, which will enable it to enter the ADAS sensor market, is
part of its strategy to capitalize on the growing vehicle autonomy and automation market.

LKP Research 34
 SONA BLW PRECISION FORGINGS LIMITED

Company profile
Sona BLW Precision Forgings (Sona) is a multi-product, multi geography auto ancillary company
which is into manufacturing products like differential gears (32% of revenue), differential
assemblies (23%), starter motors for hybrids and ICE (21% and 15%, respectively), traction
motors for two-wheeler electric vehicles (4%) and others (5%). Exports account for 71%, with
the U.S. and Europe being the largest markets (43% and 20% of total exports, respectively).
Plant and Facilities
The Company has nine manufacturing and assembly facilities located across India, USA, Mexico
and China, of which six are located in India. The facilities in India (Chennai), China, Mexico
and USA manufacture conventional and micro/plug-in hybrid starter motors and BLDC/PMSM
traction motors. The plants in Gurugram, Manesar and Pune (India) manufacture differential
gears, differential assemblies and other gears. While the facilities in India are manufacturing
plants, the facilities in the US, Mexico and China operate as satellite final assembly plants.

Capacities - : Tecumseh, USA - 1 mn starter motors; Irapuato, Mexico - 1 mn starter motors;

Hangzhou, China - 1 mn starter motors; Gurugram, India – 31.9 mn gears; Manesar, India – 1.2
mn differential assemblies; Pune, India - 9.3 mn gears; Chennai, India - 3.8 mn starter motors
& 0.15 mn traction motors.

Plants and locations

Source: Company, LKP Research

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 SONA BLW PRECISION FORGINGS LIMITED

Product Summary and their applications in various vehicles

Source: Company, LKP Research

LKP Research 36
SONA BLW PRECISION FORGINGS LIMITED

Product segment details

Contribution Avg.
Product
Product ICE EV Description to revenue realisation
Segment
FY23 (US$)
• Differential bevel gears are components that are
used in almost all vehicles and are required as soon
as a vehicle axle is driven. When driving around
corners, the outer wheel has to cover a bigger
Differential Bevel PV, OHW
PV distance than the inner wheel, which also means
Gears and CVs
that the outer wheel must turn faster than the inner
wheel. The differential is used to achieve the speed
difference. It includes two side shaft bevel gears and
two pinion bevel gears.

• A spiral bevel gear is a bevel gear with helical $15

(set of 4
teeth. The main application of this is in a vehicle 32%
gears)
differential, where the direction of drive from the
Spiral Bevel Gears OHW n/a drive shaft must be turned 90 degrees to drive the
wheels. The helical design produces less vibration
and noise than conventional straight-cut or spur-cut
gear with straight teeth.
DRIVELINE
• The spool drive system uses a spool differential
which transforms power from the gearbox directly
Spool Gears n/a PV to the wheels through the crown gear, without any
differential mechanism so, the two wheels will get
same amount of power delivered

• The differential assembly is a system of gears that $40

allows different drive wheels (the wheels to which (non-BEV
PVs, DA)
Differential Assembly PV power is delivered from the engine) on the same 23%
OHW
axle to rotate at different speeds, such as when the $50
car is turning. (BEV DA)

• An Electronic Differential Lock (EDL) is a system

which works alongside a stability control and/or
Electronically Locking traction control system to alter the amount of torque
n/a PV
Differential (EDL) (turning power) that is distributed to the wheels
during turning to help the car keep a grip on the
road.

• Starter Motor Micro-Hybrid - An electric device

that part from cranking the engine, automatically
PV, OHW shuts the engine to reduce engine running time.
Starter Motor n/a 36% $40-$50
and CVs Conventional - An electric device required to crank
the engine and provide initial starting power to the
engine

MOTORS • This product combines the functionality of the

starter motor and alternator in an ICE vehicle and
allows for the creation of the MHEV. Implementing
Belt Starter a BSG/ISG on an ICE vehicle enables a significant
PVs n/a n/a
Generator amount of extra functionality including start-stop,
energy recovery during coasting/braking, energy
generation from the ICE, and even electric drive (or
boost) depending upon the vehicle.

LKP Research 37
 SONA BLW PRECISION FORGINGS LIMITED

Product segment details

Contribution Avg.
Product
Product ICE EV Description to revenue realisation
Segment
FY23 (US$)
• The Permanent Magnet Synchronous Motor
(PMSM) is an AC synchronous motor whose field
Traction Motor excitation is provided by permanent magnets and
n/a PV
(PMSM)* has a sinusoidal back EMF waveform. The PMSM is
a cross between an induction motor and brushless
DC motor.
• The Permanent Magnet Synchronous Motor
(PMSM) is an AC synchronous motor whose field
2W, excitation is provided by permanent magnets
Drive Motor (PMSM) n/a
3W and has a sinusoidal back EMF waveform. The
PMSM is a cross between an induction motor
and brushless DC motor.
• A Brushless DC Electric Motor (BLDC) is an
electric motor powered by a direct current 4% $250
Hub Wheel Motor
n/a 2W voltage supply and commutated electronically
(BLDC)
instead of by brushes like in conventional DC
motors.

Integrated Motor • The IMCM is designed to generate an exact

Controller countering force to mitigate the impact of
n/a PV
Module uneven surfaces so that the vehicle can glide
over all kinds of roads.

• The electric vehicle controller is the electronics

package that operates between the batteries
2W,
Motor Controller n/a and the motor to control the electric vehicle’s
3W
speed and acceleration much like a carburetor
does in a gasoline-powered vehicle.
• The e-axle, or e-drive, combines an electric
vehicle’s gear, motor, and power-control
electronics. It’s the “brain” that controls how
DRIVELINE
e-Axles n/a 3W a vehicle manages energy stored in its battery 1%
+ MOTORS
and transforms it into power. It also helps to
recover energy lost in braking and returns it to
the battery.

• Sona’s acquisition of Novelic, which will enable

it to enter the ADAS sensor market, is part of
Others NOVELIC
its strategy to capitalize on the growing vehicle
autonomy and automation market
Source: Company, LKP Research

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 SONA BLW PRECISION FORGINGS LIMITED

Revenue Mix

By Product By Segment
4%
3% 3% 4% 3% 5% 1% 1%
9%
16% 16% 17% 17% 15% 13%
26% 24% 17% 15%
34%
40% 14% 16% 14%
21% 22% 18%
26% 21%
30% 27%
10% 17%
4% 5% 23%
6% 18% 27%
63% 62% 65% 68% 68% 69%
43% 42% 35% 28% 32%
25%

FY18 FY19 FY20 FY21 FY22 FY23

FY18 FY19 FY20 FY21 FY22 FY23
Others
Conventional Starter Motors
Micro/ Plug-in Hybrid Starter Motors PV CV OHV E2W/E3W
Differential Assembly
Differential Gears

Source: Company, LKP Research Source: Company, LKP Research

By Powertrain By Geography

4% 6% 5% 1% 1%
18% 15% 1% 7% 7%
25% 2% 2% 8% 18%
27% 16%
35% 18% 20%
23%
27%
31% 38% 22%
31%
34% 32% 29%
42% 27%
25% 26%
47%
26% 21%
27% 49%
42% 40% 43%
29% 36% 33%
25% 26%
17% 14%
1% 2%
FY19 FY20 FY21 FY22 FY23 FY18 FY19 FY20 FY21 FY22 FY23
Battery EVs Micro-hybrid/ Hybrids North America India
Europe Asia (excl. India)
Power neutral source ICE Dependant Rest of the world

Source: Company, LKP Research Source: Company, LKP Research

LKP Research 39
 SONA BLW PRECISION FORGINGS LIMITED

Market share and competition

Global Market Share of

CY19 4.5% CY20 5.0% CY21 6.3% CY22 7.2%
Differential Gears

Global Market Share of

CY19 2.5% CY20 3.0% CY21 4.6% CY22 4.1%
Starter Motors

Passenger Vehicles Commercial Vehicles Tractors

While Sona continues to dominate the

Indian market for Differential Gear

55-60% 80-90% 75-85%

Source: Company, LKP Research

Segment Market shares Key competitors

Differential gears India PV - 55-60% PVs -Sundram Fasteners, Kalyani Group, IP Rings

India CV - 80-90% CVs- American Axle, Meritor, Dana

India Tractors - 75-80% Tractors - New Allenbery, Punjab Bevel Gears, GNA, Bharat Gears

Global PV/CV/OHV - 7.2% Global PVs - American Axle, Showa Corp, Musashi Seimitsu Ind, Meritor, GKN
Eaton Plc, Dana, American Axles, Linamar Corp, JTEKT, ZF , Schaeffler,
Differential Assembly Global ICE PV/CV/OHV - 5%
GKN Driveline, BorgWarner
Global BEV - 8.7% Hyundai Wia Corp
Starter Motors Global - PV/CV,OHV - 4.1% Schaeffler, Mahle, Spark Minda, Auto Ingnition, SEG Automobiles, Lucas TVS
Traction Motors for e-2Ws Mahle, Lucas TVS, Bosch, SEG Automotive
Source: Company, LKP Research

LKP Research 40
SONA BLW PRECISION FORGINGS LIMITED

Investment Argument
Niche technical capabilities provides the moat
Sona’s multi product business is more or less shielded from new entrants. Barriers to entry
remain elusive across most new product categories for EVs; in addition, in the e-2w space,
OEMs too have forayed into the design and development of certain key electronic and software-
intensive components like BMS and Motor Controllers. On the forging side, players having
cold/warm forging capabilities like Sona, Sundram Fasteners and Bharat Forge might be better
poised to capitalize on opportunities arising from the EV transition. Cold and Warm forgings are
a more precise endeavor (v/s hot forgings and castings) requiring a greater level of expertise,
creating a higher barrier to entry. Players in the space would benefit importantly from more
stringent NVH (Noise, Vibration, Harshness) requirements for EVs. Competition in India’s hot
forging sector remains fierce, with ~90% of the country’s installed capacity dedicated to it. Still,
those with large presses and superior technical abilities would continue to hold their ground.

Sona being into Warm/Cold forging business earns the brownie points. Going forward, it is
likely that credible forging players like Sona, Sundram Fasteners, Bharat Forge with requisite
cold/warm forging knowhow might sharpen their focus on lucrative products like gears and
transmission as well. Aluminium casting players are likely to experience ongoing intense
competition, yet they may still benefit from increased aluminum requirements for passenger
vehicles over the medium to longer term as a result of EV proliferation.

Comparision of hot and cold/warm forging

Hot Forgings Cold Forgings/Warm Forgings

• Hot forging technology has been around • Cold/Warm forging technology was
for millennia. ~90%+ of forging capacities in invented only in the 20th century. Only
India are for hot forgings. ~5% of forging capacities in India are for
cold forgings.

• Low complexity; largely commoditized • High process complexity; cold forgings

offerings. Margin for errors is higher in the involves multiple stages including
hot forgings process – typically, the flash coating and heat treatment and
(Excess metal is squeezed out between the involves a lower margin of error as
die parting lines) . compared to hot forgings.

• It is performed above the recrystallization • Cold: Forging at room temperatures,

temperature between 950–1250 °C. self-heating up to 150 °C due to the
forming energy
• Warm: Forging temperatures
between 750–950 °C - keeps it below
recrystallization temperature, so that
properties do not change. Hence,
complexity and size can be better than
that in cold forgings.

Source: Industry, LKP Research

LKP Research 41
SONA BLW PRECISION FORGINGS LIMITED

Tailwinds of Electrification to benefit Sona

As demand for starter motors (~37% of revenue), forming part of the Motors division is expected
to wane with growing EV penetration; as a means of de-risking, Sona is focusing on traction
motors (BLDC+PMSM) across e-vehicle categories. Increased product complexity under EVs,
especially in the transmission products (higher NVH requirements) would increase realizations/
margins and importantly, continue to strengthen the barrier to entry. Sona’s electrification
strategy is geared towards covering the entire power and voltage spectrums across driveline
and traction motor products – this would enable them to cater effectively to all OEM categories
from e2W to electric performance vehicles - which is in turn reflected in the new product
pipeline across the driveline and motor divisions. EV now contributes 77% of the total order
book of ₹221 bn at the end of Q2 FY24. In Q2 FY24, the company’s BEV segment contributed
27% to the topline while growing at 58% yoy, while in FY23, BEV business grew by 26% an
contributed 26% of the total revenues. The company has several EV products on the roadmap,
which give strong growth visibility without assuming any market growth. Production Linked
Incentive (PLI) benefit may flow through from FY25 onwards after products are approved in
FY24. The 2W EV segment has overcome the regulatory hurdle of FAME II subsidy withdrawal
and is back on a strong run.

Revenue Mix by Product (%)

26.0%
25.0%

6707

14.0%

2.0% 2057
174
1.0% 234

FY19 FY20 FY21 FY22 FY23

BEV Segment Revenue (Rs. Mn) % of Revenue

Source: Company, LKP Research

LKP Research 42
 SONA BLW PRECISION FORGINGS LIMITED

Industry expects BEV to have 12%/29% share in total PVs in CY25E/CY30E

0.4 3.3
2.1 0.3 8.5
5.4 12.2
5 10 28.6
12
13.3
20.9 14.8
97.2 13.4
86.3
68.25
54.8
43.2

CY15 CY20 CY23E CY25E CY30E

ICE+Micro Hybrid Mild Hybrid Full Hybrid BEV

Source: Industry, LKP Research

Order book ( ₹ bn) Q1 FY22 Q2 FY22 Q3 FY22 Q4 FY22 Q1 FY23 Q2 FY23 Q3 FY23 Q4 FY23 Q1 FY24 Q2 FY24
PV 74 72 104 101 115 117 152 142 139 139

EV 2W & 3W 6 7 12 12 21 21 19 17 20 22
CV & OTH 0 0 1 1 2 2 2 6 13 13
Sub- Total EV 80 79 117 114 138 140 173 166 171 172
PV 30 26 26 37 33 27 24 17 13.2 11
2W & 3W 24 22 22 21 22 23 26 19 17.6 18
Non-EV
CV & OTH 6 9 12 13 13 13 14 13 16 18
Sub-Total Non EV 60 57 60 71 68 63 64 49 49 49
Total 140 136 177 185 206 203 237 215 220 221
Source: Company, LKP Research

EV contribution growing for Sona in order book

77%

66%

14%

1% 2%

FY19 FY20 FY21 FY22 FY23

Source: Company, LKP Research

LKP Research 43
SONA BLW PRECISION FORGINGS LIMITED

New business wins and expanding portfolio put Sona on a strong footing
Company added ₹6bn of new orders, taking order book to ₹221 bn in Q2 FY24, where 78% of
the order book is for EVs. It got 2 new order wins in the quarter: 1.) ₹1.7bn from a new age e-PV
player in North America for supplying Rotor Embedded Differential Sub-Assembly, production
commencement from Q2 FY25 2.) ₹3.7bn from established Indian OEM for supplying Mid-
Drive Traction Motor for its e-3W, production commencement from Q3 FY25. While small in
quantum, these orders underscore Sona’s expanding product capability. The company earns
not more than 20% from a single client, while its top 10 clients contribute to 80% of its topline.
Company is planning to reduce this contribution by winning new such clients, products and
programs.

Sona emphasized its expanding focus to address the evolving trends in mobility: electric,
personalized, intelligent and connected. The company added several new components to its
future product roadmap: lightweight differentials, robotic gears, integrated motor controllers,
non-auto mobility motors, and sensors for in-cabin, short-range and zone monitoring. Sona’s
net order book was flat qoq at ₹221bn, 6.4x FY24E revenues. Including the effect of orders
already flowing into revenues, we estimate that Sona’s revenue potential has risen 5% QoQ and
45% in the last 8 quarters
Underlying segmental drivers remain intact
Management indicated growth continues in most markets; PV segment has been good while
CV and Off Highway segments reported slightly lower growth. With slurry of new launches in
PVs across the world and higher electrification, PV segment shall remain strong and should
benefit Sona as PVs contribute about 63% of its current order-book and 70% of its topline in
H2 FY24. Higher electrification and premiumization shall increase the number of DAs and DGs
(driveline products) in vehicles, thus bolstering content per vehicle. Traction motor sales have
bounced back from Q1 lows on the back of regulations. Sona is expanding capacity (by end of
FY25) of EV traction motors at Chennai plant from 400,000 units currently to 600,000 units, and
setting up PCB assembly for 500,000 units as the company has high hopes from Traction Motors
demand considering low penetration of EVs in Indian 2W market (5%) and rising preference for
EV 2Ws in India. Starter motors are eventually expected to zero down as per management on
ICE dependence, but its timeline is uncertain.
Global EV adoption trends continues to inch up well
While US EV share has inched up to 8.6% in H1 FY24 (up 1% yoy), EU/China has seen some
moderation off late. Industry expects EV adoption in key geographies such as EU to increase
its contribution and touch ~21% by 2025E and ~48% by 2030E. Similarly, in the US, EV share is
expected to jump from 8.6% in H1 FY24 to ~10% in 2025E and ~29% by 2030E. While in China,
this share is expected to reach 39% in 2025E from 30% currently. Tesla, the market leader has
been leading the EV adoption wave globally, and its global EV market share inched up to ~17% in
Q3 CY23 (vs 13% in 2022). However, the ramp-up in the past few quarters has been slower than
anticipated, with Q1 CY23 production volumes being largely flat on a qoq basis. The company
has taken multiple price cuts over the past few months, which should keep volume momentum
healthy, in our view. Tesla management guided that it plans to increase production to align with
its average 50% CAGR volume growth target, over a multi-year horizon, with volumes of 1.8mn
for CY23. Also, with manufacturing capacities ramping up in EU/US and the Cybertruck launch
planned from US, we expect overall volume growth to be much stronger in ex-China plants.

LKP Research 44
 SONA BLW PRECISION FORGINGS LIMITED

While in India, EV preference among consumers across both 2Ws and cars remains strong. In
2Ws, EV share continues to grow from 4% to 5.63% yoy of the industry currently. Incumbents
such as TVS Motors and Hero MotoCorp are ramping up capacity, while new players such as Ola
(unlisted) are aggressively planning to launch new models to drive volumes. We expect 2W EV
share to reach 6%/7% by FY24E/25E
Differential gears and assemblies – Multiple positive levers for growth
The differential is a mechanical device that allows one wheel on an axle to turn faster than the
other while ensuring an appropriate distribution of torque between them - by splitting the axle
and putting a set of gears between the two halves.

Differential Assembly (23% of FY23 revenue) - Sona designs, develops and manufactures
high torque drive units (i.e., differential assembly with final gear) and different variants of
differential assemblies such as, final drive assembly, sealed differential, open differential,
limited slip differential and forged case differential using special processes such as induction
hardening, and hardening and tempering. Its pinion shafts which are used in assembly of gears
have anti-seizure coatings such as manganese phosphating, electroless nickel plating, quench
polish quench (QPQ), gas nitriding and diamond like coating which enables EVs to operate at
higher speed. Sona also offer differential assemblies with precision ground drive gear to meet
stringent NVH requirements for EVs.

EV drivetrains are more complicated than conventional powertrains. Very high RPM in electric
drives cause NVH issues in EVs. This results in higher technological complexity in differential
gears and assembly design. This in turn results in higher price realization for differential gear
assembly in EVs than conventional powertrains. Average realization of a nonBEV DA currently
stands at ~US$40 per unit and the price of DA used in BEV is ~25% higher compared to non-BEV
vehicle given the increased NVH requirements. The management has indicated that differential
assemblies can go from $30/PV to $300/PV - with EDL (Electronically Locking Differential) at the
higher end of the range, while can go up to $300 at the top for PVs and $900 going to the top
of range. Currently the global DA market size is about $4.1 bn. Industry expects the global DA
market to grow at a CAGR of ~4% through FY21-FY25E; however, importantly, expect the BEV
DA market to grow at a CAGR of ~44% over this period at $4.37 bn. Sona enjoys a market share
of ~12% in this space.

Forward integration in BEV DAs drives substantial increase in realizations DA turning sizeable for Sona

Realization (USD)
DA as % of total revenue

83 32%

25%

50
40 17%

11.5
4% 4% 5%
Set of 4 bevel ICE DA for PVs BEV DA BEV DA +
gears Reduction gear FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, LKP Research Source: Company, LKP Research

LKP Research 45
 SONA BLW PRECISION FORGINGS LIMITED

Differential gears (32% of FY23 revenues, 7% global market share) - Sona manufactures net
shaped differential gears, which provide significant advantages over conventional machine-
cut gears including, superior quality, increased strength, higher durability, design flexibility,
consistent uniformity, long-lasting performance and lighter weight. Since Sona designs and
manufacture gears in-house using proprietary technology, including the dies used to forge
gears, and form the gears’ teeth from inception instead of cutting, it utilizes lower amounts of
raw materials making the product cost-effective.

In 3QFY23, Sona launched the electronically locking differential (EDL) used in high-performance
and off-road vehicles to enhance stability, traction and safety. The EDL uses electronic actuators
to lock the wheels on the left and right sides of the vehicle together. This allows the wheels
to rotate at the same speed, providing maximum traction and stability. The differential is
controlled by a computer that receives input from various sensors such as the vehicle speed,
steering angle and yaw rate. The computer then uses this information to determine when the
differential should be locked or when it should be unlocked based on the driving conditions
and the driver’s inputs. The technology enables better performance in off-road and difficult
weather conditions. Sona also launched couple of new products in Q4 such as the input shafts
and intermediate gears

As popularity of SUVs and Crossover UVs increases, the proportion of Part time AWD and Full
time AWD drive types would increase. Both FWD & RWD would have one DA/vehicle. However,
Part time/Full time 4WD would require two DAs (one on front axle and one on rear axle) to offer
the ability to steer wheels on each axle when power to transferred to the same. Typically, DAs
comprise of a set of 4 DGs. Industry expects the global DG market to grow at a CAGR of ~6%
through FY21-25E at US$1.45 bn from US$1.1 bn; Sona continues to improve upon its share in
this space (currently ~7%)

Number of gears double going from 2WDs to 4WD Gears increase significantly going from single-axle to multi-axle CVs

Number of differential gears in PV Number of differential gears in CV

8 20

4
6 6

LCV (2WD) M&HCV (2WD) M&HCV (4WD) with

2WD 4WD/AWD inter axle differential gear

Source: Industry, LKP Research

LKP Research 46
SONA BLW PRECISION FORGINGS LIMITED

Forward integration from gears to differential assemblies results in ~4x ASP

Realisation (USD)

40

11.5

Set of 4 bevel gears ICE DA for PVs

Source: Company, LKP Research

Traction Motors, a new entrant in Sona’s portfolio, has strong potential to grow
Sona is one of the leading manufacturers of traction motors, aided by its portfolio of high
efficiency/torque density motors across BLDC and PMSM motors. In Mar 22, Sona introduced
its next generation of motors and controllers, Motor T with optimised controller family. As
per the management, ‘Motor T with optimised controller’, with next generation technology,
has the highest efficiency (96%), power and torque density in 48V category in the world. Sona
currently has an installed capacity of ~250K units p.a. for hub motors and ~75-100K units p.a.
for PMSM motors at its Chennai plant. In 3QFY22, Sona announced a new order win of ₹4 bn
(Delivery FY25) for the Predictive Active Suspension Integrated Motor Controller Module (PAS-
IMCM). The PAS-IMCM is a futuristic suspension system in which the motor generates an exact
counteracting force to mitigate the impact of uneven road surfaces so that the vehicle glides
over all kinds of roads. The e2W motor supply chain is currently dominated by Germans; Sona
is making inroads in this space aided by its efficient and cost-effective motor solutions. Sona is
one of the motor suppliers for TVS’s and Ampere’s e2Ws. Sona achieved its capacity in Aug 22
to 100K EV traction motors and announced in Nov 22 that it is further expanding its capacity at
its Chennai plant for motors.

In BEV, traction motors are prime movers and located in the front/rear or both depending on
the vehicle configuration. Industry estimates indicated that vehicles with traction on both axles
would increase going forward, which along with the steady increase in the size of the motor
(due to higher power requirements) would lead to a sharp increase in the content per vehicle.
Key global players in the high voltage traction motor segment include Bosch, Valeo-Siemens,
GKN, Schaeffler, LG, Hitachi, Borg Warner, ZF etc. High voltage Traction motors market size by
the end of FY 22 was ₹6.65 bn, which is expected to grow at a CAGR of 40% between FY 21-26E
up to ₹22 bn.

LKP Research 47
SONA BLW PRECISION FORGINGS LIMITED

Domestic BLDC business to be driven by EV penetration

Growth in the domestic BLDC (Brush-Less DC) motor market is expected to be led by the
growing penetration of electric 2W. While PMSM (Permanent Magnet Synchronous Motor) has
advantage of compact nature and higher power efficiency, cost competitiveness of the BLDC
motors might ensure dominance as the preferred traction motor technology over the medium
term. Currently, Sona has a capacity of ~250k units p.a. for hub motors at Chennai; its market
share across the domestic 2W/3W space is currently ~15%. While currently, e3W volumes as %
of e2W+e3W volumes are material, going forward, e2W volumes would drive the demand for
BLDC motors on the back of the sheer industry size and rapid penetration.

E-2W traction motor offers high value with additional content from controller The BLDC motor
has become a standarized product. However, combining it with a controller (with embedded
software) could deliver a differentiated solution to OEMs.The per unit cost of BLDC motor
is~₹9000, while an addition of controller increases the cost to ₹12000, thus increasing the
content per vehicle. Domestically, the BLDC market is expected to expand at CAGR of 110% to
₹7 bn in the period between FY21-26E from FY22 market size of ₹622 mn.
Starter Motors Industry may eventually shrink, Sona likely to win market share though…
Globally across all segments (Passenger Vehicles, Commercial Vehicle, Tractors) key
competitors for Sona include Denso, Borg Warner, SEG Automotive, Hitachi, Valeo etc. Given
Sona’s exposure to the PV segment (which also happens to be the largest segment for starter
motors) Industry expert Ricardo expects Sona to be among the top ten global starter motor
suppliers. Sona’s global market share of starter motors stood at 4.1% in CY22. Hence, with need
for starter motors in micro, mild and full hybrid vehicles being largely offset by decline in sales
from pure ICE vehicles, we estimate the global market for starter motors to remain largely static
over FY22-26E. Moreover, as technological interventions result in greater penetration of BEVs,
making them the mainstream choice of EV buyers in the future, the market for starter motors
will keep shrinking.

However, in the interim, we believe Sona will continue to grow led by market share gains given
starter motors manufactured by it are 1) light and compact, 2) able to withstand a wide range
of temperatures (for European/US markets) and 3) have longer life cycles as compared to peers.
Sona and SEG Automotive are two of the largest starter motor exporters from India with a
combined market share of 70%. Lucas TVS exported approximately 120,000 starter motors per
annum for PV OEMs. Spark Minda, Auto Ignition, Mahle together export approximately 120,000
starter motors per annum catering to off-highway segments.

LKP Research 48
 SONA BLW PRECISION FORGINGS LIMITED

…with increasing share of micro-hybrid starter motors in Starter

Micro-hybrid starter motors have over 15% higher realization…
Motor business

59% 61% 61%

58%
44
53% 53%

34%
29% 27% 26%
21% 23%
20%
17% 17%
38 10%

FY18 FY19 FY20 FY21 FY22 FY23 FY24E FY25E

Conventional starter motor Hybrid starter motor
(USD/unit) (USD/unit) as % of Total revenue as % of Total starter motor revenue

Source: Industry, LKP Research

Hybridisation to drive growth for Sona’s BSG (Belt Starter Generator) business
Sona has successfully completed vehicle level demonstration of the 48V BSG system to
selected global OEMs, and it is currently undergoing testing in compliance with international
specifications. OEMs and suppliers are competing to develop and market new and alternative
technologies that can meet future Corporate Average Fuel Efficiency (“CAFÉ”) norms, leading
to a growth in the hybrid vehicle market. Sona has developed 48V BSG (P0 configuration) for
hybrid PVs and LCVs with technology meeting global standards offering high fuel economy and
CO2 reduction. These motors are designed to use high power density magnets leading to high
power to weight ratio and higher efficiency over broad speed ranges. Going forward, in the
mild hybrid segment the proportion of other configurations (P1 and P2) is expected to increase
primarily due to the fuel consumption/CO2 benefits and the current estimate is that that this
is likely to reduce the proportion of the BSG units to approximately 60-65% (from 92% in 2020)
by FY 25E. But since the overall mild hybrid vehicles volume is increasing, we may see growth
in 48V BSG motors. Valeo is the market leader in this space. Key competitors in the 48V BSG
segment are Valeo, SEG Automotive, Continental, Hyundai Mobis.
Novelic acquisition – Smart foray into the ADAS sensor market
Sona’s acquisition of the Serbian company Novelic in January 2023, which will enable it to enter
the ADAS sensor market, is part of its strategy to capitalize on the growing vehicle autonomy
and automation market. Sona acquired 54% equity stake in Novelic for Euro40.5 mn through
a combination of primary and secondary purchases with a staggered payment structure in the
ratio of 60:20:20 at closing and in 12 months and 24 months, respectively. Novelic is valued
at a pre-money EV of Euro 64.5mn and post-money valuation of Euro 75mn. The transaction
is funded primarily from Sona’s existing resources and is closed by the end of March and
will be EPS accretive for Sona from the first year itself. Novelic is a profitable high-tech, fast
growing company, in $43 bn ADAS Sensors market, with ~27% net profit margin. Novelic is
into Unique and patented mmWave radar technology which is the best solution for in-cabin
sensing. Novelic’s full vertical integration from chip and sensor design to signal processing
software allows partnership across the value chain –auto OEMs, AV makers, Tier-1s & chip
manufacturers. This acquisition is therefore accretive to Sona’s EPS and provides significant
growth opportunities over medium-term. This acquisition is also important marking Sona’s
diversification from non-driveline, non-motors domain.

LKP Research 49
SONA BLW PRECISION FORGINGS LIMITED

Foreign acquisitions/tie-ups remained the key for technical capabilities of Sona and
other players in the cold/warm forging industry
In the 1960s, BLW (Germany) made a breakthrough in precision forging technology, by which,
gears would directly be forged, instead of being cut from blanks. BLW was also the inventor of
the warm forging technology. In 1984, Surinder Kapoor – Founder of Sona, who was running
Bharat Gears then, approached BLW for a license for the above gear manufacturing technology;
Bharat Gears was making differential gears. However, BLW refused. In 1992, when Surinder
started Sona, he went to Mitsubishi Materials which was a licensee of BLW and got the
license from them. In addition, tooling solutions provided by Mitsubishi were technologically
advanced. That is how Sona Okegawa Precision Forgings was formed - the forging arm of the
Sona Group. In 2005, Surinder Kapoor approached BLW again – by this time it was taken over
by the ThyssenKrupp group and was called ThyssenKrupp Precision Schwede - with an offer to
merge or buy or be bought. But was refused. In 2007, the group agreed to sell. The Blackstone
led merger of Comstar in FY20 brought to the fold starter motors capabilities.

In 2018, Blackstone Group acquired Chennai-based auto parts maker Comstar Automotive
Technologies Pvt. Ltd for about ₹10 bn from Comstar’s controlling shareholders—private
equity firm Argyle Street Management and the Chandaria family. Comstar, a maker of starter
motors, starter motor kits and alternators for automotive applications, was founded in 1999
as a subsidiary of Visteon Corp., a unit of Ford Motor Co. in India. Comstar was sold to Hong
Kong-based Argyle Street Management and the Chandaria family in 2007. At the time of the
transaction, Comstar had an installed capacity of over 3.8 million starter motors and 1 million
alternators in India and 800,000 starter motors in North America. It counts Ford Motor, Volvo,
Tata Motors, Ashok Leyland-Nissan, Renault Nissan, Geely, Jaguar, Aston Martin and Mazda as
customers. Comstar is reputed for its zero PPM quality standards and its innovation culture
which has helped the company produce ‘Photon’ - the world’s lightest starter motor. Then, in
FY23, Sona forayed into sensors with the acquisition of Novelic.

Similarly, Sona’s close competitor Sundram Fasteners acquired the Cramlington Precision Forge
facility of Dana Spicer Europe Limited in FY05. CPFL manufactures differential gears, dog tooth
clutches, hydraulic pump gears, power tool components, tractor differential gears, earth moving
vehicle components, and passenger car coupling flanges and crown wheels. This acquisition
aided SFL absorb cold and warm forging technologies.

In FY09, Hirschvogel Automotive Group entered into a 51% JV with Kalyani Thermal Systems
Ltd., a sister company of Bharat Forge; the new company was known as Hirschvogel Kalyani
India Pvt. Ltd., Hirschvogel. The company was to produce warm/cold-forged transmission shafts
and pinions as well as constant-velocity joints, diesel injection components and wheel hubs,
in addition to machining and in-house die shop facilities. In FY12, Hirschvogel Automotive
Group brought out Kalyani’s stake in the said JV. Kalyani Thermal Systems, since renamed as
Kalyani Technoforge Ltd, is engaged in the manufacture of forged and machined components
like connecting rods, crankshafts, transmission gear blanks, automotive bearings and machined
gears for 2W, PC, and LCVs. Kalyani Technoforge is classified as a related party by Bharat Forge.

LKP Research 50
SONA BLW PRECISION FORGINGS LIMITED

Equipmake agreement, a step into newer but allied segment

Sona has recently signed an agreement with Equipmake, a UK-based technology company that
develops high-performance electric powertrains. Equipmake’s patented technology offers high
power density and efficiency with high performance for electric cars, buses, and commercial
vehicles. Under the agreement, Equipmake will license certain patented spoke motor and
inverter technology in the power range of 100kW to 440 kW to Sona to manufacture and sell
EV Powertrains, sub-systems, and components for electric cars, buses, commercial vehicles
and off-road vehicles. Sona will lead the business development and customer sales in India,
Thailand and select South Asian countries, while Equipmake will lead the sales in the rest of
the world. Sona will exclusively manufacture EV Powertrains, sub-systems, and components,
based on Equipmake’s patented technology, for the target applications exclusively in India
and other select markets. Sona will also manufacture and sell EV Powertrains, sub-systems,
and components for the target applications to Equipmake and its global customers in other
overseas markets. The companies expect the serial production of these systems to commence
in 2025. Sona should get a good entry point as far as new product is concerned and also new
geographies of Thailandd and South Asia.

Equipmake is a significant player in the world market with several customers

• Repowered 12 buses for First Bus; Secured another order for

First Group (UK)
repower of a double-deck bus

• Launch of customer trials of an Equipmake converted fully-

London Routemaster
electric London Routemaste

• Delivered bespoke EV drivetrains for Emergency One Fire

Emergency One (UK)
Trucks; Secured further orders from them

• Zero-emission powertrain fitted bus completed preservice trails

Agrale(Argentina)
and started in-service trials in Nov-22

European Electric • Long-term contract to supply ASIL-D compliant motor drive

Hypercarb inverter
Source: Company, LKP Research

CRISIL expects the demand for electric passenger vehicles in India to increase to 25% in FY32, up
from less than 1% in FY22, led by the commercial segment (fleet) due to favourable economics.
In absolute numbers, it estimates the electric car market in India to grow from 30k units in FY22
to 1.6 mn in FY32. CRISIL has projected the penetration of electric buses in India to increase
to 11% in FY27 and 21% in FY32, up from 5% in FY22, driven by improving unit economics,
government push at state transport undertakings (STU) and ESG concerns. STU will initially drive
electric bus penetration, followed by school and staff bus segments. In absolute numbers, CRISIL
estimates the electric buses market in India to grow from ~1.6k units in FY22 to over 27k in FY32.

LKP Research 51
 SONA BLW PRECISION FORGINGS LIMITED

Both Global and Indian BEV markets with high-voltage applications have strong growth projections

GLOBAL
BEV Car Market – in ‘000s BEV Bus Market – in ‘000s BEV MHCV Market – in ‘000s

420
31,000 350

260

16,000 210

7,300 63
58
CY22 CY25 CY30 CY22 CY25 CY30 CY22 CY25 CY30

Source: Company, LKP Research

INDIA
BEV Car Market – in ‘000s BEV Bus Market – in ‘000s

1,600 27

13

2
47 300

FY23 FY27 FY32 FY23 FY27 FY32

Source: Company, LKP Research

Premiumisation shall lead to higher content per vehicle

We are observing a rapidly growing trend in every segment of the automobile industry shifting
from lower/mass segment vehicles to high priced premium segment. Among the PVs, the
SUV segment is turning out to be the biggest contributor to the demand (~52% by the end
of FY23) in line with the successful launches from almost all the automakers and affordable
price ranges. Also the EV proliferation is welcomed by the customers in the industry. Globally
4WD penetration is also increasing and so is higher HP tractors driving the growth in the OTR
segment. All these are pointing towards increasing content per vehicle and thus in turn higher
profitability.

LKP Research 52
 SONA BLW PRECISION FORGINGS LIMITED

Increasing share of SUVs in global PVs… …as well as in India

42%
7 6 6 6 6 5 4 4 4
23.1
21 21 25 28 28
10.1 34 39
29.6 48 52
27%

16% 72 73 69 66 66 61 57
48 44
55 61 40.5

2010 2015 2020

FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23
Cars (m units) SUV (m units) SUV as % of total PV Car SUVs MPVs

Source: Industry, LKP Research Source: Industry, LKP Research

4WDs’ share in ICE PVs increasing gradually (% of total)… …with BEVs also seeing similar trends towards 4WDs (% of total)

31 25 27 29 30
32 33 35 36 37 37 32 34
38 38 39 39

69 75 73 71 70
68 67 65 64 63 63 68 66
62 62 61 61

FY15 FY16 FY17 FY18 FY19 FY20 FY21 CY22 CY23E CY24E CY25E FY20 FY21 FY22 FY23 FY24E FY25E

2W Drive 4W Drive 2W Drive 4W Drive

Source: Industry, LKP Research Source: Industry, LKP Research

Share of multi-axle trucks down in last two years, but expected to

Share of higher HP tractors going up
normalize as cycle recovers

Share in dom. tractors (%) % of dom. trucks MAV

9.5
8.1
6

53.5 40% 39%

46.5 48.7 37%
35% 33% 33% 34%
31%
26%
19%

FY15 FY20 FY21

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
41-50 >51 HP

Source: Company, LKP Research Source: Company, LKP Research

LKP Research 53
 SONA BLW PRECISION FORGINGS LIMITED

Financials

Revenues vs Revenue Growth EBITDA vs EBTDA margins

50.9% 29.5% 30.4%

28.2% 28.5%
26.2% 25.4%
23.3%
36.0%

27.8%
24.6% 25.4%
21.6%

13.5%

10,380 15,663 21,306 26,550 33,290 40,484 45,937 2,423 4,410 5,591 6,753 9,488 11,943 13,965

FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E

Revenues (Rs mn) % Growth EBITDA (Rs mn) % Margins

Source: Company, LKP Research Source: Company, LKP Research

PAT vs PAT margins ROE vs ROCE

30% 27% 27%
26%
19.8%
18.9% 25%
18.0%
14.6% 16.3% 20% 20% 24% 23%
15.0% 19%
20% 22%
12.4%
15% 17% 17% 17%
12%

10%
11%

5%
1,283 2,291 3,483 3,988 6,003 7,666 9,106
0%
FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E

PAT (Rs mn) % margins ROE ROCE

Source: Company, LKP Research Source: Company, LKP Research

LKP Research 54
SONA BLW PRECISION FORGINGS LIMITED

Outlook and Valuation

Q2 results for Sona were quite strong with highest margins after 10 quarters. Favorable product
mix and operating leverage led to superior margin performance. Management has guided for
25-27% EBITDA margins for FY 24, however Sona reported 27.9% margins in Q2. Commodity
benefits also shall start flowing as metal prices are stable. We continue to like Sona’s strategy of
expanding its component portfolio to address the intensifying electrification and autonomous
trends in global auto industry. Given this, the company continues to add new customers/
programs/products in its portfolio. We reiterate our favorable view on the stock owing to 1)
new product introductions with significant potential 2) product portfolio aligned with rapid
electrification globally, 3) addition of new segment through Novelic acquisition (to add to the
numbers fully from coming quarter) and Equipmake tie-up (commencement in 2025) 4) healthy
order book, with 5) superior margins and return ratios. We maintain Buy with a maintained
target price of ₹707 (valued at 45x FY26E earnings of ₹15.60, which is rich, but we believe
premium valuations will sustain, given strong long-term growth outlook. Key risks are sharp
global auto downturn, lower sales volumes for key customers, and slow ramp-up of new orders.
Accrual of PLI benefits remains the upside risk.

LKP Research 55
 SONA BLW PRECISION FORGINGS LIMITED

Income Statement Balance Sheet

(₹ mn) FY 23 FY 24E FY 25E FY 26E (₹ mn) FY 23 FY 24E FY 25E FY 26E
Total Revenues 26,550 33,290 40,484 45,937 Equity and Liabilities
Raw Material Cost 12,199 14,315 17,206 19,294 Equity Share Capital 5,854 5,854 5,854 5,854
Employee Cost 1,803 2,164 2,510 2,756 Reserves & Surplus 17,047 21,249 26,615 32,990
Other Exp 5,795 7,324 8,826 9,922 Total Networth 22,901 27,103 32,469 38,844
EBITDA 6,753 9,488 11,943 13,965 Total debt 487 537 587 637
EBITDA Margin(%) 25.4% 28.5% 29.5% 30.4% Deferred tax assets/liabilities 876 876 876 876
Depreciation 1,780 1,961 2,455 2,788 Other curent liabilities 831 831 831 831
EBIT 4,973 7,526 9,488 11,177 Total non-current liab and provs 2,194 2,244 2,294 2,344
EBIT Margin(%) 18.7% 22.6% 23.4% 24.3% Current Liabilities
Other Income 322 320 400 460 Trade payables 2,489 2,919 3,327 3,524
Interest 169 150 123 110 Short term provisions+ borrowings 2,944 3,144 3,344 3,544
PBT 5,126 7,696 9,765 11,527 Other current liabilities 172 172 172 172
PBT Margin(%) 19.3% 23.1% 24.1% 25.1% Total current liab and provs 2,194 2,244 2,294 2,344
Tax 1,138 1,693 2,100 2,421 Total Equity & Liabilities 30,597 35,479 41,504 48,325
Adjusted PAT 3,988 6,003 7,666 9,106 Assets
APAT Margins (%) 15.0% 18.0% 18.9% 19.8% Gross block 13,344 16,344 21,344 25,344
Exceptional items 34 0 0 0 Accumulated depreciation 5,135 7,096 9,550 12,338
PAT 3,954 6,003 7,666 9,106 Net block 8,209 9,248 11,793 13,006
PAT Margins (%) 14.9% 18.0% 18.9% 19.8% Capital WIP 693 1,193 1,493 1,793
Other non current assets 8,693 8,693 8,693 8,693
Key Ratios Total fixed assets 17,596 19,135 21,980 23,492
Cash and cash equivalents 441 1,409 3,054 7,570
YE Mar FY 23 FY 24E FY 25E FY 26E
Other bank balance 257 257 257 257
Per Share Data (Rs)
Inventories 3,229 5,491 6,128 6,343
Adj. EPS 6.8 10.3 13.1 15.6
Trade receivables 6,089 6,202 7,099 7,677
CEPS 9.8 13.6 17.3 20.4
Other current assets 2,986 2,986 2,986 2,986
BVPS 39.2 46.4 55.6 66.5
Total current Assets 13,001 16,344 19,524 24,834
DPS 2.1 3.1 3.9 4.7
Total Assets 30,597 35,479 41,504 48,326
Growth Ratios(%)
Total revenues 24.6% 25.4% 21.6% 13.5%
Cash Flow
EBITDA 20.8% 40.5% 25.9% 16.9%
EBIT 19.2% 51.3% 26.1% 17.8% (₹ mn) FY 23 FY 24E FY 25E FY 26E
PAT 14.5% 50.5% 27.7% 18.8% PBT 5,092 7,696 9,765 11,527
Valuation Ratios (X) Depreciation 1,780 1,961 2,455 2,788
PE 93.8 62.3 48.8 41.1 Interest 161 150 123 110
P/CEPS 65.2 47.0 37.0 31.4 Chng in working capital -630 -1,945 -1,125 -597
P/BV 16.3 13.8 11.5 9.6 Tax paid -1,102 -1,693 -2,100 -2,421
EV/Sales 14.1 11.3 9.2 8.0 Other operating activities 33 0 0 0
EV/EBITDA 55.6 39.5 31.3 26.4 Cash flow from operations (a) 5,334 6,169 9,118 11,407
Operating Ratios (Days) Capital expenditure -3,351 -3,500 -5,300 -4,299
Inventory days 182.2 140.0 130.0 120.0 Chng in investments -101 0 0 0
Recievable Days 72.0 68.0 64.0 61.0 Other investing activities -2,278 0 0 0
Payables day 34.2 32.0 30.0 28.0 Cash flow from investing (b) -5,629 -3,500 -5,300 -4,299
Net Debt/Equity (x) 0.10 0.09 0.09 0.08 Free cash flow (a+b) -295 2,669 3,818 7,108
Profitability Ratios (%) Inc/dec in borrowings 150 50 50 50
ROCE 19.8% 25.6% 27.3% 27.1% Dividend paid (incl. tax) 1,199 1,801 2,300 2,732
ROE 17.4% 22.1% 23.6% 23.4% Interest paid 12 150 123 110
Dividend payout ratio (%) 30.3% 30.0% 30.0% 30.0% Other financing activities -113 0 0 0
Dividend yield(%) 0.3 0.5 0.6 0.7 Cash flow from financing (c) 187 -1,701 -2,173 -2,592
Net chng in cash (a+b+c) 536 441 1,409 3,054
Closing cash & cash equivalents 441 1,409 3,054 7,570

LKP Research 56
 SUPRAJIT ENGINEERING LIMITED
....connecting globally

Suprajit Engineering (SEL) is the market leader in domestic automotive cables, a leading
Rating BUY
player in global automotive and non-automotive cable space. The company has grown leaps
and bounds through its organic and inorganic growth over the past years. We are positive Current Market Price (₹) 399
on SEL due to (1) The positivity in the underlying domestic automobile industry, where SEL 12 M Price Target (₹) 488
is a dominant player with market share in 2Ws (~75%) and 4Ws (~32%). (2) Synergies with Potential upside (%) 22
LDC to help add new clients and products to its portfolio. This will lead to a significant jump
in the financials within our time horizon. (3) New products to help drive content per vehicle.
(4) Likely recovery in non-auto business (84% is Wescon) and product portfolio expansion. Stock Data
(5) The advantages of scale and India-based production helps SEL maintain cost leadership Sector : Auto Components
vis-a-vis its peers on the global platform thus growing the margin profile. Furthermore, SEL FV (₹) : 1
maintains a strong free cash flow generating model with nominal capex requirements along Total Market Cap (₹ bn) : 55
with a minimal net debt balance sheet. We are building in Revenue/ EBITDA CAGR of 8%/
Free Float Market Cap (₹ bn) : 30
14% over FY23–26E along with RoE/ RoCE of 14.4% / 16.2% for FY26E. We value SEL at 27x
52-Week High / Low (₹) : 446 / 317
FY26E EPS (currently trading at 22x FY26E EPS) to arrive at a TP of ₹488.
12M Avg. Dly Traded Volume (in lakh) 2
Abundant gains expected from the domestic automobile industry
BSE Code / NSE Symbol : 532509 / SUPRAJIT
SEL is the market leader in automotive cables with ~75% market share in 2W OEMs (48%
Bloomberg : SEL IN
of segment revenue) and ~32% in 4W OEMs (18% of segment revenue). We believe SEL
will benefit from the recovery in 2W and 4W OEMs. In the aftermarket cable segment, a
large part of the business lies with unorganized players. Aftermarket accounts for ~16% Shareholding Pattern

of the cable division’s revenue. However, over the last few years, SEL has gained from the (%) Sep-23 Jun-23 Mar-23 Dec-22

shift in business from the unorganized to the organized players. However, exports, which Promoter 44.62 44.64 44.64 44.64
contribute ~18% of the segment revenue, are impacted by the adverse macro conditions. MFs 14.68 14.73 14.65 14.18
We believe a recovery in the foreign markets will further add to the growth. We expect SEL’s FPIs 4.76 5.11 5.07 5.10
auto cables revenue to clock a 14% CAGR over FY23–25E. Bodies Corporate 3.81 3.73 3.77 3.74
LDC acquisition, a synergic fit! AIF 1.10 1.09 1.22 1.36
With the acquisition of Light Duty Cables (LDC), SEL became the second largest player in Others 31.03 30.70 30.65 30.98
cables globally. The huge scale of operation, close proximity to customers, cost leadership, Source: BSE
and complementary customer & product portfolio will further aid SEL in the export market.
Currently, LDC is facing the challenge of delayed cost pass-through from customers, which Price Performance
has impacted profitability; however, the company under SEL is negotiating with customers.
(%) 1M 3M 6M 1YR
We expect profitability to recover going ahead and estimate a 10% margin in FY25E. We
Suprajit 5.3% 1.1% -4.8% 20.9%
also expect SEL and LDC to gain a significant market share in the global automotive cable
Nifty 50 6.2% 10.2% 11.4% 18.0%
industry (~5% currently) and the latter to post revenues of ₹7.6bn / ₹8.8 bn in FY24E/ FY25E.
* To date / current date : January 3, 2024

Key Financials FY 23 FY 24E FY 25E FY 26E

Total sales (₹ bn) 28 29 32 34 Suprajit vs Nifty 50

EBITDA margins (%) 11.9% 10.9% 12.0% 13.1% 140

PAT margins (%) 6.0% 5.5% 6.4% 7.2% 120

100
EPS (₹) 12.0 11.8 14.7 17.9
80
P/E (x) 33.2 33.9 27.1 22.3
60
P/BV (x) 4.5 4.1 3.6 3.2
40
EV/EBITDA (x) 17.4 17.5 14.5 12.1 20 Suprajit Engineering Nifty 50
ROE (%) 13.6% 12.0% 13.4% 14.4% 0
Jan-23 Apr-23 Jul-23 Oct-23 Jan-24
ROCE (%) 14.4% 12.9% 14.6% 16.2%

LKP Research 57
SUPRAJIT ENGINEERING LIMITED

Non-traditional business to act as the next phase of growth

Suprajit Electronics Division (SED) and Suprajit Technology Center (STC) have developed several
new products like digital clusters, electromechanical actuators, rotary sensors, throttle position
sensors, etc. These products have been received very well by customers. In a short span, it has
received orders worth ₹1.5 bn from traditional and new-age OEMs. The company has started
its first supply to a leading E2W OEM, where the content is significantly higher than the ICE
business. SEL started a new facility for electronic products in Bengaluru in Nov 2022. We see a
huge potential for SEL in the electronics business and believe it can cross-sell these products to
its existing customers owing to its strong customer relations.
Non Auto business is facing headwinds currently, long term outlook looks good
SEL derives ~90% of the non-auto business revenue from the overseas markets (Wescon Controls
& Shanghai Lonestar). It is the largest cable manufacturer for the OPE segment in the USA. The
company is facing challenges in the non-automotive business due to the macro headwinds in
its operating markets. However, we foresee the situation improving from H2 FY24. Further,
expanding its geographic footprint in markets like Brazil, Mexico, China, and the EU (via LDC)
should aid growth. We expect revenue CAGR of 8% in the non-auto business over FY23–25E.

LKP Research 58
 SUPRAJIT ENGINEERING LIMITED

Growth Journey

Source: Company

Group Structure

Source: Company

LKP Research 59
 SUPRAJIT ENGINEERING LIMITED

Cables in 2Ws Cables in PVs

Source: Company

Key Customers across segments

Segment Customers

TVS Motor, Bajaj Auto, Hero MotoCorp, Honda Motors, Yamaha, Piaggio, Harley Davidsson, Atul Group,
Two & Three-wheeler cables
Mahindra, Royal Enfield, KTM, Suzuki

BMW, VW, Renault, Nissan, GM, Toyo Seat, Maruti Suzuki, ISRI Seats, M&M, Suzuki, Ford, Skoda, Swaraj
Mazda, Hyundai, Force Motors, Inteva, Bosch, J-Ushin, Land Rover, PHA, Lear, Benteler, BOS GmbH & Co.
Automotive
KG, ITW, Toyota, Edscha, Brose, Minda Industries, Ashok Leyland, Tata Motors, Aston Martin, Witte, Magna,
BEHR, Jaguar, VECV

Lighting Unitech Machines Ltd., Varroc, Rinder India, Fiem, Valeo, Magneti Mareli, Hella, Neolite, IJL

John Deere, Husqvarna, Piaggio, MTD, TORO, Honda Power Equipment, Jacobsen, EZGO, TAFE, Kubota,
Non-Automotive
Codica Automotive, JCB, New Holland, Whirlpool, Briggs & Stratton

Source: SEL

Strong Customer Traction

Source: Company

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Product & Application per Vehicle

Source: Company

Revenue break-up

Consolidated Reveunes - Business divisions wise distribution Geography wise

23% 20% 20% 20% 19%

25%
34% 39% 39%
40% 41% 41% 40%
53%
21% 20% 21% 23% 13%
21%

17%

66% 61% 61%

56% 59% 60% 59% 59% 60% 59% 59% 60%
45% 47%

FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23

Automotive Cables Phoenx Lamps Non Automotiva Cables(SENA) LDC Domestic Global

Source: Company, LKP Research

Client verticals wise Client verticals - Q2 FY24

3%
Non-
16% 20%
21% 21% 21% 23% 22% Automotive
25%
19%
24% 17%
2W OEM
22% 22% 20% 18% 34%
34%
32%
23% 21% 21% 23% 27% 26%

19%

40% 37% 36% 36% 37% 35% 33%

Aftermarket
25% 22%
4W OEM
FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 25%
2W Aftermarket PV Non-Automotive

Source: Company, LKP Research

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Investment Argument
Domestic Cables Division – An Ace in the Pack
TVS was the very first and single client of SEL in 1985. Since then, it has strategically expanded
its footprint, gaining significant SOBs with key OEMs including TVS (100%), Hero (~80%), Bajaj
Auto (~80%), HMSI (70%), RE, and Yamaha. 2W OEMs contribute 48% to the automotive
cables revenue. SEL holds a dominant position as the market leader in Indian 2W OEMs,
commanding a market share of over 75%. While SEL’s dominance in the cable division for 2W
OEMs is substantial, the potential for further wallet share gains with existing OEMs remains
limited. Nevertheless, we are factoring in a robust recovery of approximately ~11% CAGR in 2W
sales from FY23 to FY25E. This growth is underpinned by several factors, including improved
rural incomes driven by - a). Higher crop yields and better MSPs, b). Increased demand in the
premium motorcycle segment, and c). The emergence of replacement demand. Furthermore,
SEL’s strong presence among new-age OEMs presents an additional upside to our revenue
projections. Typically, an ICE 2W has ~5–7 cables, used mainly for the clutch, speedometer,
seat, brakes, throttle, and lid opening. Whereas EVs don’t require cables for throttle and clutch;
thus, increasing electrification can have a marginal impact on the content per vehicle of cables
over the longer term. However, new-age electronic products will compensate for the loss of
cable business in EVs.

Break-up of Automotive Cables division

Exports
18%

Aftermarkets Domestic 2W OEMs

16% 48%

Domestic 4W OEMs
18%

Source: Company, LKP Research

2W Industry - Volumes & Growth

18.4%

12.0%
10.0%
5.0%

-11.4%
-13.4%
-17.6%
21.2 17.5 15.1 13.4 15.9 17.4 19.5

FY 19 FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E

Volumes (mn units) % growth (%)

Source: LKP Research

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PV business to see a strong growth, SEL’s PV business to grow at par with the industry
SEL commands a market share of approximately 32%, a significant increase from the 20% in
FY15, primarily achieved through inorganic expansion. It entered the 4W Auto Cables business
with the acquisition of Shah Concabs Pvt. Ltd. in 2002 and further scaled up the business with
the acquisition of the Speedo cables business from Pricol in FY15. We expect 4W OEM revenue
to grow at ~12% CAGR over FY23–25E ahead of industry. It currently has a marginal presence in
Maruti Suzuki India (MSIL), where there is scope for industry to gain traction. Currently, MSIL’s
main supplier is Hi-Lex, the Japanese player. Moreover, in the medium term, we anticipate an
increase in the content of cables in 4W vehicles, driven by the growing trend of premiumization.
On an average, a PV contains 15– 20 cables, which are used for actuating various mechanisms
like seats, windows, sunroofs, doors, boots, etc. We believe that even with the increasing
premium features and increasing electrification in PVs, OEMs will continue to favor Cables as
they represent the most cost effective means of actuation.
Robust presence in the global markets to make an easy expansion of business segment
SEL’s non-auto business derives a majority of its revenue from Wescon Controls which caters to
the US non-auto market and Lonestar Shanghai caters to the Chinese Open Power Equipment
(OPE) industry. ~80% of the non-automotive revenue comes from the OPE segment. It is the
largest cable manufacturer for the OPE segment in the USA, which includes lawn movers,
trimmers & edgers, snow throwers, etc. and serves customers like MTD, Husqvarna, John Deere,
TORO, Honda, etc. The overseas market contributes ~90% of the non-automotive revenue. SEL
acquired Wescon in FY17. Wescon traditionally operated and maintained a presence largely
in the OPE segment, but failed to expand in other product segments due to lack of focus from
the previous promoter (a PE fund). There lies a sizeable opportunity in the allied segments
like agriculture, construction, power-sports, medical equipment, home segments, etc., which
SEL is looking to tap. Each of these segments is estimated to have a market size of USD 25–
75 mn per year. It has already started making cables for tractors, construction machines,
and electrical appliances (washing machines), and is currently supplying to players like TAFE,
Kubota, Whirlpool, JCB, etc. Additionally, SEL also plans to expand its geographic footprint
besides venturing into new markets like Brazil and Mexico.
About 28% of LDC’s revenue comes from the non-auto segment, of which 20% is from the
OPE segment in different geographies and 8% from motorcycles and other end-user segments.
Postacquisition, LDC would help increase SEL’s OPE business presence in China and Europe
besides adding newer non-auto segments.
Currently the non-Auto business is in weak lane considering slowdown in Europe and rising
interest rates in the US. This impacted Q2 results of Supajit as the SCD business de-grew by
5.5% yoy, while margins dropped to 3.4%.
Cost competitiveness and market share gains to anchor SEL well in the US markets
The non-auto market in North America is highly fragmented with smaller players dominating a
particular product category. We believe that SEL will be able to expand its presence in different
categories, led by its cost competitiveness and strong balance sheet. Over the last three years,
the US non-auto market has seen significant consolidation, with financially weaker players
going out of business. Management has guided that it would continue with the three-plant
strategy of supplying low-cost products out of India, medium-cost products out of Mexico, and
high-cost products out of the US.

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The company’s manufacturing presence in India and large scale of operations give Wescon a
significant cost advantage over its competitors in the US/ EU. However, currently this business is
facing challenges due to rising interest rates in the US markets. However, management believes
this to settle down in the ensuing quarters.

Non Automotive revenues brak-up

India
10%

Overseas
90%

Source: Company

Largest domestic halogen lamps supplier Phoenix Lamps will be driven by Replacement
growth
Phoenix Lamps is the largest automotive halogen bulb manufacturer in India with ~80% share
in 2W, 50% in PV, and ~75% in CV OEM segments. After the acquisition of Osram’s Chennai
facility (23mn capacity), Phoenix Lamps is the only remaining large manufacturer of halogen
headlamps in India with a total capacity of 110mn bulbs per annum. The halogen lamp industry
is seeing consolidation, largely led by the increasing adoption of LEDs. OEMs contribute~30%
to the segment revenue for PLD, which is a declining business due to the shift towards LEDs.
Halogen bulbs are being replaced by LEDs across the industry. LEDs are superior to halogen in
terms of technology and offer greater flexibility in terms of design; they have better aesthetic
properties and are also superior in terms of energy efficiency. We believe that LEDs will capture
a dominant share in the automotive lighting space over the medium term. The possibility of
obsolescence of halogen lamps is driving consolidation in the industry. PLD has reported a
strong growth in Q2 FY24 of 7.7% yoy and margins of 12.3% on strong replacement growth.
We expect consolidation to play out in the global halogen market
Over the last three years, a few of the small and financially weaker players have already exited
the market; we believe that over the next 2–3 years, a few more players will exit, leading to
a reduction in capacity. Even the larger bulb manufacturing players like Osram have started
focusing on the LED opportunity. Phoenix is one of the stronger players and the third largest
player in the auto halogen lighting business globally. It is well positioned to benefit from the
ongoing industry consolidation. It has already started supplying halogen lamps to competitors
like Osram. PLD primarily caters to the aftermarket segment in the overseas market. Exports
contribute ~55% to the segment revenue. The company operates the overseas business through
two wholly-owned subsidiaries i.e. Trifa and Luxlite. PLD supplies to most countries in Europe
and select regions in South America and East Africa.

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Going forward, management intends to increase its geographic presence by entering the markets
of North America, Russia, and China, which are significantly larger markets for halogen bulbs.
These markets are expected to be serviced directly from India, thus giving it a cost advantage.
In FY20, PLD acquired the assets of Osram Lighting. Osram is the world’s largest manufacturer
of halogen bulbs and competes with SEL in the Indian market. As part of this acquisition, SEL
signed a sale-back agreement with Osram, under which SEL manufactures bulbs under the
‘Osram’ brand and sells in the domestic market, thus replacing a part of its competition. The
collaboration with Osram also benefits SEL in terms of getting access to Osram’s global customer
base. Furthermore, SEL has started supplying to Osram in the overseas market. In the domestic
aftermarket segment, which is largely dominated by unorganized players, SEL has ~70% market
share in the organized market. SEL serves aftermarket through two distribution channels similar
to the Auto Cables business - OEM aftermarket sales & Own distribution network.

PLD revenue distribution

Domestic AM
Domestic OEM
15%
30%

Export AM
55%

Source: Company

LDC acquisition, a big driver for growth in the coming years

In October 2021, SEL entered into an agreement to acquire the assets of Kongsberg Automotive’s
Light Duty Cables (LDC) business unit. The asset-purchase deal was valued at an EV of USD 42
mn. LDC is a prominent player in the cable and cable-based actuation systems market, serving
major OEMs and Tier-1 suppliers. Its product portfolio consists of a broad range of mechanical
cables and electromechanical actuation (EMA) systems. LDC can manufacture ~106 mn cables
per annum through its three production facilities in Mexico, China, and Hungary (low-cost
manufacturing locations) while it also has nine sales offices located in close proximity to major
customers. Over the years, SEL has strengthened its presence in the domestic Auto Cables
business by leveraging its cost competitiveness, economies of scale, and robust customer
relationships.

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Suprajit Electronics Division (SED) is the driver for future innovative products
SEL, through its technology center in Bengaluru (STC), has developed several new products
that are complementary and allied to its current product offerings, thus expanding its overall
product portfolio. A few of these products like the electronic throttle unit are also replacements
for the current product (throttle cable). These newly launched products are also expected to
increase SEL’s kit value due to higher realizations. For instance, the throttle cable (eThrottle ASP
is 3–4x higher) and analog speedometer (launched Digital Speedometer) and increase in the
number of products. Furthermore, SEL is also focused on developing sub-assemblies, which can
be cross-sold to OEMs and in the aftermarket. Till date, SEL has developed products such as the
Electronic Throttle Control Unit, CBS Systems, and Drop in LED solution (aftermarket), Digital
Instrument Clusters, Brake Shoe, and Seeder Gear Boxes with electromechanical clutches.
Economies of scale and lean cost structure leads to good bargaining power
SEL has established itself as the cost leader in the Auto Cables industry. It is the largest Auto Cable
manufacturer in India and the second largest in the world, thus benefitting from economies of
scale. Furthermore, it has adopted the strategy of manufacturing from low-cost locations like
India, Mexico, Hungary, and China and selling in other geographies through its warehouses near
the customer base, making the cost structure lean through lower employee costs and lower
overheads. Thus, being a cost leader, SEL is able to gain greater traction in the cost-conscious
OEM market. For instance, the closest competitor (Hi-Lex), a Japanese supplier, suffers from
high employee costs due to the highly paid foreign Japanese expats that it employs and higher
overheads thus limiting its ability to develop cables at a low cost and compete effectively in the
cable industry.
Aftermarket business in India to grow higher than OEM
The domestic aftermarket for Auto Cables is largely dominated by unorganized players, with
SEL having a 17%–18% market share, as per the management. Also, the aftermarket is largely
centered around the 2W segment. SEL has a network of more than 400 dealers and has over
20,000 retail touch-points in India. Aftermarket contributes ~16% to the company’s total Auto
Cables revenue, up from ~10% in FY15. Management expects the share of the aftermarket to
rise to 25% over the medium term, led by market share gains as customers are increasingly
opting for organized branded players. We expect the auto cables aftermarket segment to grow
ahead of the OEM business over the medium term.
Inorganic expansion opens a plethora of products and markets for SEL
Over the years, SEL has successfully grown and diversified the business through acquisitions.
These acquisitions have strengthened the core automotive business along with diversifying
into newer products such as Automotive Headlight Lamps (Phoenix Lamps) and the non-auto
segment (US-based Wescon Controls).

SEL did its first acquisition of Shah Concabs in FY03 to enter the cable manufacturing business
for 4Ws. Then in April 2006 it acquired CTP Gills Cables Ltd., a UK-based cable manufacturer to
enter the 4W cables export business and expand into the EU automotive markets. Through this
acquisition, SEL gained access to customers like BMW, VW, GM, etc. mainly based in Europe. It
ramped up Auto Cables export revenue (SAL & SEU) from ₹410 mn in FY10 to ₹1,925 mn in FY21.

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It then acquired Pricol’s Speedo business and started supplying 4W cables to MSIL in Sep 2014
for ~₹52 mn. Further, SEL entered the lighting business with the acquisition of Phoenix Lamps,
which was the largest manufacturer of halogen lamps in India and among the top five globally.
This acquisition helped SEL expand its footprint in the domestic aftermarket by providing access
to retail touch-points and the distributor network. Post this acquisition, SEL’s management
focused on increasing its presence in the global aftermarket segment by investing in modern
technology (₹300 mn in a new H7 line), diversifying into the aftermarket segment in other
geographies, and optimizing European subsidiary operations. However, this segment was
largely affected by pricing pressure, lower auto sales in the EU, and transition to LEDs.

SEL acquired Wescon from Nova Capital (PE fund) to enter the non-auto market of North
America. Wescon was a market leader in the OPE segment. It is now striving to tap several
niche non-auto segments with market sizes each of USD 25–75 mn in America. Also, through
Wescon, SEL got an opportunity to supply to the European operations of its existing customers.
Meanwhile, management has successfully turned around Wescon over the last three years.

The company purchased the halogen light assets of Osram Chennai in FY20 at a reasonable
valuation, thus expanding its capacity to 110 mn lamps and becoming the third-largest
automotive lamp manufacturer globally, besides adding a new customer in Osram global.

Latest acquisition is Norway’s Kongsberg Automotive’s light-duty cables business, which was
acquired at EV/sales of 0.47x and EV/EBITDA of 4.5–5x in CY21E. It provides a huge opportunity
in the global Auto Cables market, with revenue at USD 72 mn (3% market share) and a huge
available capacity located at cost competitive locations (Hungary, China, and Mexico). SEL plans
to turn around its performance by providing more management focus to grow its revenue and
reduce overheads. Earlier, it was not a core business area for Kongsberg, thus it led to lack
of management focus. Moreover, it is a synergistic acquisition with a lot of value unlocking
prospects for the company’s core Auto Cable and SENA (Suprajit Engg Non Auto) businesses.

SEL has always been prudent in acquisitions and has consciously acquired companies where it
can improve operational performance and turn it around through its expertise and increased
management focus. It has been scouting to acquire companies with a dominant market position
and a decent financial profile at fair value.

Additionally, the acquisitions were done with minimal impact on the company’s financials and SEL
has consistently maintained stable return ratios over the last 11 years. Also, it has largely funded
the acquisitions through internal accruals, thus keeping the balance sheet in good shape.

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Financial Capsule
Revenue Outlook
We expect 12% revenue CAGR for SEL over FY23–25E, led by all-round growth across business
segments and an incremental ₹8.7 bn from LDC revenue. Auto Cable business is expected to
grow at 15% largely driven by 16% growth in the domestic cable business (DCD), while SCD
is expected to grow at 7% CAGR impacted by macro challenges in foreign markets in FY24
followed by a sharp recovery in FY25. We further expect LDC to contribute ~₹8.7 bn in FY25
with a growth of 13% CAGR FY23–25. We also foresee PLD’s performance remaining muted at
7% CAGR on the back of restructuring and slowdown in the EU market.

Revenues/ EBITDA/ EBITDA margins

17.5%

15.2% 14.7% 15.1% 14.5%

13.1%
11.9% 12.0%
10.9%

4,516
3,822
3,266

3,207
2,674
2,502

2,470
2,413

2,292
14,546

15,899

15,628

16,409

18,405

27,524

29,426

31,854

34,473
FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E

Revenues (Rs mn) EBITDA (Rs mn) EBITDA margins (%)

Source: LKP Research

Revenue break-up trend : Business wise

1% 2% 3%
13% 13% 12% 12%
20% 20% 19%

42% 43% 43% 43%

52% 51% 53%

45% 43% 42% 42%

28% 29% 29%

FY 20 FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E

SCD DCD Phoenix Lamps SED

Source: LKP Research

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Margin expansion to happen on LDC consolidation

SEL has been a highly cost-conscious company and has kept strict controls on costs over the
years. While we expect margin expansion of ~120 bps/ 60 bps in matured businesses like Auto
Cables and SENA on the back of improvement in product mix and softening commodity prices,
the overall margin is expected to grow by 270 bps between FY23-25E largely due to recovery
in LDC’s margin. We expect LDC’s margin profile to improve with business synergies coming
into play, getting the cost pass-through from customers, and improving management focus.
Historically also SEL has been successful in turning around investments with its cost control
initiatives and streamlining of operations.

Margin Trend

25.0%

19.4% 20.0%
18.6% 19.0%
20.0% 18.0%
17.0%

15.0% 12.9%
10.5% 11.0%
10.2% 10.0% 10.0%
10.0% 8.2% 8.0%
7.1% 7.0%
5.3% 5.0%
5.0%
6% 6%
5%
0.0%
FY 21 FY 22 FY 23 FY 24E FY 25E FY 26E

SCD DCD Phoenix Lamps SED

*SCD - Automotive and Non Automotive exports from India and businesses outside India
*DCD - Cables and certain new products in India
Source: LKP Research

Balance Sheet to remain healthy, to be aided by strong cash flow generation

Over FY13-22, SEL has generated ~₹15 bn as operating cash flow and has spent ~₹10 bn in capex
and investments. Over these years, the company has also acquired Pricol’s Speedo business,
Wescon, Phoenix Lamps, Osram’s Chennai facility, and Kongsberg’s LDC business between FY14
and FY22. Over FY23–25E, we expect capex requirements to remain moderate, which along
with strong operating cash flow generation will lead to a reduction in debt. FY23 debt has gone
up owing to the costs related to the LDC acquisition. Management has also indicated that most
of the capacity expansion is complete, and over the next two years, a majority of the capex will
be towards maintenance. However, it has also indicated that it continues to scout for inorganic
opportunities in related technologies. We thus factor in ~₹1.2 bn debt repayment over FY23–
25E leading to lower interest costs.

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SUPRAJIT ENGINEERING LIMITED

Debt Reduction

0.26

0.22

0.18
0.16

0.10

0.06
0.04

838 571 395 3,134 2,984 2,734 2,684

FY 21 FY 22 FY 23 FY 24E FY 25E FY 25E FY 26E

Debt (Rs mn) Net debt/Equity

Source: LKP Research

Capex

3,217

2,181
1,520 1,702
1,110
755
1,012 946 930 1,114 975
290 444

FY 21 FY 22 FY 23 FY 24E FY 25E FY 25E FY 26E

(3,402)

Capex (Rs mn) FCF (Rs mn)

Source: LKP Research

ROE (%) Versus ROCE (%)

17.1% 17.1% 17.6%

16.2%
14.4% 14.6%
16.6% 12.9%
15.5% 15.6%
14.4%
13.6% 13.4%
12.0%

FY 21 FY 22 FY 23 FY 24E FY 25E FY 25E FY 26E

ROE (%) ROCE (%)

Source: LKP Research

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Risks
Risk of product obsolescence:LEDs are gaining prominence and are preferred over halogen
lamps by OEMs. With an increasing preference for LEDs, the price difference between LEDs and
halogen lamps has significantly narrowed. The price differential in FY19 was at ~7–10x, which
has reduced to ~2–2.5x. Increasing adoption of LEDs poses a risk to PLD. However, we believe
that demand from the aftermarket segment, where PLD has a dominant position, will continue.
Also, the company has introduced LEDs in the aftermarket segment, which it can expand going
ahead.

Delayed recovery in the automobile industry: A large part of SEL’s revenue is dependent on the
automobile industry. We believe that the auto industry is set for a recovery, but any delay in this
recovery can affect the company’s top-line estimates.

Geopolitical Risks: SEL has significant exposure to foreign markets like the EU and the
US. Geopolitical issues, if they are prolonged, can affect the company’s growth prospects.
Furthermore, inflation and recessionary risks can further hurt exports.

Currency Risk: About 40% of SEL’s revenue comes from exports. The company exports primarily
to the US and the EU. Any adverse currency movements can affect the top-line. However, the
company has a natural hedge for part of this revenue as the costs in foreign subsidiaries are in
the same currency. Also, SEL hedges a part of its exposure on a rolling basis.

Outlook and Valuation

Suprajit Engineering (SEL) is the market leader in domestic automotive cables, a leading player in
global automotive and non-automotive cable space. The company has grown leaps and bounds
through its organic and inorganic growth over the past years. We are positive on SEL due to
(1) The positivity in the underlying domestic automobile industry, where SEL is a dominant
player with market share in 2Ws (~75%) and 4Ws (~32%). (2) Synergies with LDC to help add
new clients and products to its portfolio. This will lead to a significant jump in the financials
within our time horizon. (3) New products to help drive content per vehicle. (4) Likely recovery
in non-auto business (84% is Wescon) and product portfolio expansion. (5) The advantages of
scale and India-based production helps SEL maintain cost leadership vis-a-vis its peers on the
global platform thus growing the margin profile. Furthermore, SEL maintains a strong free cash
flow generating model with nominal capex requirements along with a minimal net debt balance
sheet. We are building in Revenue/ EBITDA CAGR of 8%/ 14% over FY23–26E along with RoE/
RoCE of 14.4% / 16.2% for FY26E. We value SEL at 27x FY26E EPS (currently trading at 22x FY26E
EPS) to arrive at a TP of ₹488.

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Income Statement Balance Sheet

(₹ mn) FY 23 FY 24E FY 25E FY 26E (₹ mn) FY 23 FY 24E FY 25E FY 26E
Total Revenues 27,524 29,426 31,854 34,473 Equity and Liabilities
Raw Material Cost 16,169 17,067 18,316 19,649 Equity Share Capital 138 138 138 138
Employee Cost 5,744 6,474 6,849 7,239 Reserves & Surplus 12,106 13,374 15,032 17,085
Other Exp 2,344 2,678 2,867 3,068 Total Networth 12,245 13,513 15,170 17,223
EBITDA 3,266 3,207 3,822 4,516 Total debt 2,648 2,348 1,948 1,748
EBITDA Margin(%) 11.9% 10.9% 12.0% 13.1% Deferred tax assets/liabilities 482 482 482 482
Depreciation 955 1,010 1,144 1,258 Other curent liabilities 691 691 691 691
EBIT 2,312 2,197 2,678 3,258 Total non-current liab & provs 3,822 3,522 3,122 2,922
EBIT Margin(%) 8.4% 7.5% 8.4% 9.5% Current Liabilities
Other Income 386 550 600 625 Trade payables 2,923 3,225 3,578 3,967
Interest 356 423 370 350 Short term provs+ borrowings 3,540 3,890 4,240 4,590
PBT 2,343 2,325 2,908 3,534 Other current liabilities 1,691 1,291 1,091 891
PBT Margin(%) 8.5% 7.9% 9.1% 10.3% Total current liab and provs 8,154 8,406 8,909 9,448
Tax 681 697 872 1,060 Total Equity & Liabilities 24,220 25,440 27,201 29,592
Adjusted PAT 1,661 1,627 2,036 2,474 Assets
APAT Margins (%) 6.0% 5.5% 6.4% 7.2% Gross block 11,624 12,624 13,624 14,624
Exceptional items 0 0 0 0 Accumulated depreciation 3,549 4,559 5,703 6,961
PAT 1,661 1,627 2,036 2,474 Net block 8,075 8,065 7,921 7,663
PAT Margins (%) 6.0% 5.5% 6.4% 7.2% Capital WIP 274 220 150 125
Other non current assets 41 41 41 41
Key Ratios Total fixed assets 8,598 8,534 8,320 8,038
Current Investments 4,427 4,927 5,627 6,327
YE Mar FY 23 FY 24E FY 25E FY 26E
Cash and cash equivalents 1,068 1,471 1,619 2,501
Per Share Data (Rs)
Inventories 4,826 4,816 5,269 5,706
Adj. EPS 12.0 11.8 14.7 17.9
Trade receivables 4,608 4,998 5,673 6,328
CEPS 21.8 19.1 23.0 27.0
Other current assets 693 693 693 693
BVPS 88.5 97.6 109.6 124.5
Total current Assets 15,622 16,905 18,880 21,555
DPS 2.3 2.0 2.0 2.5
Total Assets 24,220 25,440 27,201 29,592
Growth Ratios(%)
Total revenues 49.5% 6.9% 8.3% 8.2%
Cash Flow
EBITDA 22.2% -1.8% 19.2% 18.1%
EBIT 10.7% -4.9% 21.9% 21.7% (₹ mn) FY 23 FY 24E FY 25E FY 26E
PAT -1.7% -2.0% 25.1% 21.5% PBT 2,202 2,325 2,908 3,534
Valuation Ratios (X) Depreciation 955 1,010 1,144 1,258
PE 33.2 33.9 27.1 22.3 Interest 356 423 370 350
P/CEPS 18.3 20.9 17.4 14.8 Chng in working capital -147 -78 -774 -704
P/BV 4.5 4.1 3.6 3.2 Tax paid 847 697 872 1,060
EV/Sales 2.1 1.9 1.7 1.6 Cash flow from operations 2,391 2,966 2,744 3,377
EV/EBITDA 17.4 17.5 14.5 12.1 Capital expenditure -919 -946 -930 -975
Operating Ratios (Days) Chng in investments -1,718 -500 -700 -700
Inventory days 108.9 103.0 105.0 106.0 Other investing activities -3,159 0 0 0
Recievable Days 61.1 62.0 65.0 67.0 Cash flow from investing -5,793 -1,446 -1,630 -1,675
Payables day 38.8 40.0 41.0 42.0 Free cash flow (a+b) -3,402 1,520 1,114 1,702
Net Debt/Equity (x) 0.22 0.17 0.13 0.10 Inc/dec in borrowings 2,778 -300 -400 -200
Profitability Ratios (%) Dividend paid (incl. tax) -284 -277 -346 -421
ROCE 14.4% 12.9% 14.6% 16.2% Interest paid -335 -423 -370 -350
ROE 13.6% 12.0% 13.4% 14.4% Other financing activities 0 0 0 0
Dividend payout ratio (%) 17.1% 17.0% 17.0% 17.0% Cash flow from financing 2,232 -1,049 -966 -820
Dividend yield(%) 0.6 0.5 0.5 0.6 Net chng in cash -6,963 -975 -1,482 -793
Closing cash & cash equivalents 1,000 1,471 1,619 2,501

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 VST TILLERS TRACTORS LIMITED
Cultivating fertile returns

VST Tillers (VSTT) is well-positioned to maintain its dominant market share in the power
Rating BUY
tiller market. Market share gains driven by new product launches across brands would
Current Market Price (₹) 3,589
increase the company’s addressable market. In addition, the company is strengthening
its distribution network across the country. The company has technological tie-ups with 12 M Price Target (₹) 4,608

Pubert (France) and Zetor (Czech Republic) for product development. VSTT has invested in Potential upside (%) 28
California, US-based Zimeno Inc, a manufacturer of driver optional born electric tractors
under the Monarch brand.
Stock Data
Tiller volumes have been showing a robust growth over last few years on the back of Sector : Farm Equipment
strong monsoon performance (till CY22), demand for small farm mechanisation, shortage FV (₹) : 10
of labour, subsidy for small farmers and increase in small farm lands under cultivation. Total Market Cap (₹ bn) : 31
VSTT’s leadership in compact tractors also offers it a strong position to develop further Free Float Market Cap (₹ bn) : 14
with partnerships like the one with Zetor for manufacturing higher HP tractors. This would 52-Week High / Low (₹) : 4,196 / 2,100
expand its presence in the North. Innovations in the other products like the power weeders 12M Avg. Dly Traded Volume (in lakh) 0.18
and brush cutters too should augur well for the company. Zero debt, high return ratios, BSE Code / NSE Symbol : 531266 / VSTTILLERS
improving capacity utilizations, improving margins all lends comfort to the investors. Bloomberg : VSTT IN
Management has given a optimistic revenue target of ₹30 bn revenues in FY 26, however
we believe it is a difficult task, but we still build in a 27% topline CAGR in the period between
Shareholding Pattern
FY23-26E. The stock is trading close to its historical average, at P/E multiple of 14x on its
FY26E estimates. Therefore we believe the stock looks attractive from current levels with a (%) Sep-23 Jun-23 Mar-23 Dec-22

target price of 4,608 which is 28% upside denoting a BUY rating on the stock. Promoter 55.57 55.57 55.57 55.57
FPIs 2.07 1.76 1.26 1.26
Tractors to post good growth from FY25E
MFs 16.83 18.62 19.44 19.38
On the back of low tractor sales in the past few quarters led by weak monsoons in CY23 and
unseasonal rains witnessed off late, we expect FY24 to be a muted year. With improving Bodies Corporate 2.43 1.22 1.29 1.53

MSPs, new launches, etc, we expect a revival in tractor ales in FY25E. The company has Others 23.10 22.83 22.44 22.26

reduced its target for tractor volume growth for FY24 from 10-15% to flattish on the back of Source: BSE

weak monsoons this year. However, we believe aggressive expansion into northern markets
and slew of new product launches in the higher HP segment should lift up the performance Price Performance
in the ensuing years. VSTT has already built capacity for the bigger tractors and plans to (%) 1M 3M 6M 1YR
expand its presence in a rapid way in northern markets through widespread distribution VSTT -11.7% -2.8% 25.2% 56.7%
network.
Nifty 50 6.2% 10.2% 11.4% 18.0%
* To date / current date : January 3, 2024
Key Financials FY 23 FY 24E FY 25E FY 26E
Total sales (₹ mn) 10,064 12,173 15,753 20,474
EBITDA margins (%) 12.6% 13.3% 13.8% 14.6% VSTT vs Nifty 5

PAT margins (%) 9.2% 9.3% 10.2% 10.8%

200
EPS (₹) 106.9 131.1 185.1 256.0 180
160
P/E (x) 33.6 27.4 19.4 14.0
140
P/BV (x) 3.8 3.4 3.0 2.5 120
100
EV/EBITDA (x) 24.3 18.9 13.8 9.7
80
ROE (%) 11.2% 12.4% 15.3% 18.1% 60
40
ROCE (%) 11.5% 13.8% 16.8% 20.6% V.S.T. Tillers Tractors NIFTY 50
20
0
Jan-23 Apr-23 Jul-23 Oct-23 Jan-24

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VST TILLERS TRACTORS LIMITED

Distribution spread, advancement in technology remain the key to success

Although the distribution network is separate for tillers, tractor and spares, some spares like
the brush cutters and oil pumps which are high on demand are available for sale through the
entire distribution network chain to enhance the sales further. VSTT currently has 687 tiller
dealers and 380 tractor dealers across the country with major presence in South, West and
East. The company plans to aggressively expand their presence in the North through launch of
higher horsepower tractors and wider dealership network.
Improving profitability and lean balance sheet gives us comfort
We expect input costs to remain stable in line with the current trend. Tiller volumes should
increase leading to higher operating leverage. We expect VSTT’s return ratios to revert to
peak levels. The company’s return ratios are reflective of the cyclical nature of business due
to the cyclical nature of farm business and its high dependency on monsoon and government
intervention. We expect the company’s ROCE to remain strong over the next few years. The
company is debt free and plans to expand capex by ₹500 mn this fiscal through internal accruals.

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 VST TILLERS TRACTORS LIMITED

Company background
Established in 1967, VSTT is one of the leading power tiller and compact tractor manufacturer
in India. It was established by the VST Group of companies, a well-known century old business
house in South India, as a JV with Mitsubishi Heavy Industries, Japan and Mysore State Industrial
Investment Corporation. VSTT manufactures farm equipment, namely power tillers, tractors,
power weeders, diesel engines and other precision agricultural and automotive components.
It also trades in certain other farm equipment (mainly rice transplanters), which are sourced
from China.

Headquartered in Bangalore, VSTT is now the largest manufacturer of Power Tillers in India with
its ‘VST Shakti’ being the leader in power tillers. Its tractors are marketed under ‘FIELDTRAC’
brand in various markets of European Union meeting the latest EU standards. The company has
expanded its presence in more than 20 countries over a decade and established itself as a most
preferred brand for the compact tractors

VSTT derives over ~95% of its revenues from the domestic market and has a nationwide
network of more than 680 active Tiller dealers to support sales and provide after-sales services.
VSTT’s current capacity stands at 36,000 units p.a. of tractors and it had sold 6,875 tractors in
FY23 which implies a capacity utilisation of ~19%. Tiller capacity stands at 72,000 units p.a. and
FY23 utilisation was ~53%.

VSTT is the leading farm mechanisation player domestically with a dominant market share in
the power tiller segment (75% as of FY23) and prominent market share in the compact tractor
space (10%).

Manufacturing Facilities
MYSORE MALUR HOSUR

Products manufactured: Products manufactured: Products manufactured:

Precision machined components, Power tillers, weeders, brush cutters, Tractors
sub-assemblies & Implements. reaper and many more

Capacity of manufacturing: Capacity of manufacturing Capacity of manufacturing

7,500 Nos 1,00,000 Nos 36,000 Nos
Tractor rotary at PCD Mysore Power tiller at Malur Tractors at Hosur
(Installed capacity 72,000 Nos.)
Source: Company

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 VST TILLERS TRACTORS LIMITED

Product Portfolio

POWER TILLERS WEEDERS MULTICROP REAPER

• VST 165 DI (16 HP) • VST KISAN • VST MAESTRO • VST RT70 • VST 5PR • VST 55 DLX Multi Crop
• VST 135 DI • VST 95 DI IGNITO • VST ARO PRO
• VST 130 D

BRUSH CUTTER HEDGE TRIMMERS TRACTORS

• VST P520BG • VST 242 HD • VST 223 LD • VST 223 HD • HT series – classic model • Power series – 30
• VST 226 LD • VST 243 HD • NGT series • Viraaj Series
• VST 234 MD

PRECISION COMPONENTS

Crankshafts, Camshafts & Cylinder block & Crankcase &

Locomotive Parts Rotary Tiller
Connecting rods Cylinder head Transmission case
Source: Company, LKP Research

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 VST TILLERS TRACTORS LIMITED

Sales Contribution Revenue Mix - FY23

100%
10.9%
Others
11.9% 11.9% 13.6% 13.0% 11.8%
90% 14%
80%
23.1% Power Tillers
25.6% 24.4%
70% 37.7%
27.6% 59%
39.3%
60%
50% Tractors
40% 28%
61.4% 63.8% 66.0%
30% 58.7%
48.8% 50.4%
20%
10%
0%
FY 20 FY 21 FY 23 FY 24E FY 25E FY 26E

Power Tillers Tractors Others

Source: LKP Research Source: LKP Research

Tractor Industry
Manufacturer FY 23 FY 22 % yoy MS FY23 MS FY 22
M&M 389,530 337,052 15.6% 41.2% 40.0%
Tafe 169,850 151,481 12.1% 18.0% 18.0%
Sonalika 116,000 101,060 14.8% 12.3% 12.0%
Escorts 95,270 87,168 9.3% 10.1% 10.3%
John Deere 82,660 79,308 4.2% 8.7% 9.4%
New Holland 35,370 32,053 10.3% 3.7% 3.8%
Kubota 25,710 21,104 21.8% 2.7% 2.5%
Preet 6,390 7,152 -10.7% 0.7% 0.8%
Indo Farm 6,450 6,930 -6.9% 0.7% 0.8%
VSTT 6,875 7,991 -14.0% 0.7% 0.9%
Others 11,350 12,325 -7.9% 1.2% 1.5%
Total 945,455 843,624 12.1% 100.0% 100.0%
Source: Industry

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 VST TILLERS TRACTORS LIMITED

Investment Argument
Demand for power tillers to remain healthy on demand for small area of cultivation
We expect the farm machinery industry to remain healthy over the next couple of years,
aided by healthy rural cash flows. Post COVID-19 hit the rural economy, we witnessed a strong
recovery, led by the government’s grounded initiatives for the agriculture and farming sector.
The government has hiked minimum support prices (MSPs) of 6 Rabi crops including wheat to
support farmers for their produce this fiscal. Rural cash flows have further been supported by
the government’s increased outlay for the MSP procurement (targeting farmers) and MGNREGA
(targeting migrant labours). Increase in small sized cultivating areas/plots is further driving tiller
demand given the affordability of bigger plots for small farmers. In India, about 70-80% of
farmers are cultivating in 2-3 acres area. Also high cost and non-availability of labour is driving
the tiller demand. VSTT is also in to B2B sale of power tillers which too is a lucrative stream
of business and high on demand. The company has been witnessing very strong traction for
power tillers as they grew by 17% in FY23 and 10.4% in H1 FY24. Going forward as the demand
for small farm mechanisation grows with importance of cost efficiency and high productivity,
power tillers should continue their growth momentum in the ensuing years.

Power Tillers Volumes Power Tillers Sales

Volumes % yoy Sales (Rs mn) ASP (Rs)

41.5% 63,337
213,288

52,781 190,435
13,509
170,032
43,984 154,574
38,247 140,933
137,447 10,051
20.4% 20.0% 20.0%
27,318
15.0% 7,479
19,302 5,912

3,850
2,653

FY 20 FY 21 FY 23 FY 24E FY 25E FY 26E FY 20 FY 21 FY 23 FY 24E FY 25E FY 26E

Source: LKP Research Source: LKP Research

Tractor demand in slow lane, Zetor may provide some impetus

The overall tractor industry has been growing slowly in H2 FY 24 on higher base of last year and
weak monsoon. In line with this, VSTT’s compact tractor business too grew by just 1.4% in H1
FY24. However, with slightly below than normal monsoon this year (94.4%) an upbeat festive
season, we believe there will be better growth in H2. Additionally, there has been a gradual shift
towards higher HP tractors. VSTT has already built capacity for the bigger tractors and plans
to expand its presence in a rapid way in northern markets. Its overall tractor capacity is about
36,000 units a year. The company has however reduced its target for tractor volume growth for
FY 24 from 10-15% to flattish on the back of weak monsoons this year. However, we believe
aggressive expansion into northern markets and slew of new product launches in the higher HP
segment should lift up the performance in the ensuing years.

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 VST TILLERS TRACTORS LIMITED

Launches of higher HP Zetor range of tractors (>30 HP) especially in the Northern region of the
country shall lure the customers over there where VSTT is weak. The company has launched
its first Zetor 45 and 50 HP tractors in India in November 2023 and expects to continue these
launches in the higher HP segment going forward. The management has guided us for selling
1200 Zetor tractors this year. Also the company has received and order for supplying world’s first
fully electric, driver-optional smart tractors to Monarch Tractors for which they have secured a
yearly order of supplying 1000 tractors in FY24.

Tractors Volumes Tractors Sales

Volumes % yoy Sales (Rs mn) ASP (Rs)
563,029
8,835
8,402 502,705 4,731
23.6% 7,638 448,844
7,147 6,875 6,944 404,364
3,840
10.0% 10.0%
325,976
298,727 3,117
2,880 2,780
1.0%

2,135

-14.0%

FY 20 FY 21 FY 23 FY 24E FY 25E FY 26E FY 20 FY 21 FY 23 FY 24E FY 25E FY 26E

Source: LKP Research Source: LKP Research

Strategies, new launches, partnerships to catapult VSTT into higher orbit

VSTT eyes annual revenues of ₹30 bn by FY26, from ₹8.54 bn in FY2022, at an implied revenue
CAGR of 44%. The company has laid down four six key strategies to achieve the target as follows
– 1). Steady and strong growth in Power Tiller/Small Farm Machineries (SFM) as there is no
dearth of small farm lands for cultivation in India. 2). Success in compact tractor in international
markets like Europe and the Zetor JV in India 3).Increase in the capacity utilization at Hosur plant
where EV tractors, higher HP tractors and kits for international markets are manufactured. 4).
Rural distribution and spread of network across the country. VST currently has 687 tiller dealers
and 380 tractor dealers in India, which they plan to expand up to 1000 tractor dealers in the
next few years. The company is also into distribution of oil pumps (Q2 revenues ₹30 mn) which
we believe has a great potential to expand 5). Implements business such as Power weeders,
reapers, brush cutters etc is the third biggest revenue stream for VSTT (14% of topline in FY 23)
targets to evolve from purely a power tiller company to an established small farm mechanisation
company. 6). The benefits it would derive from the Stage 5 emission norms. Apart from this, the
labour has become very expensive and a rare commodity. Therefore, farmers now do not wait
for government subsidies to buy a tiller. Better availability of finance leads to farmers leading
to buy the tillers whenever needed and encash the subsidy whenever they receive it. About
90% of farmers do not wait for subsidies to buy a tiller. This has significantly gone up from 40-
50% observed in pandemic times. Therefore, dependence on subsidies has reduced to a good
extent.

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VST TILLERS TRACTORS LIMITED

Distribution spread, advancement in technology remain the key to success

The management has given a positive outlook for tillers and implements business, while for
tractors they have reduced their forecast on sub-normal rains this year. But the company is trying
to increase its focus on increasing addressable markets through technological partnerships,
launching niche products, enhancing distribution networks and increasing brand building
exercises. In an attempt to increase its spare parts business (14% of top line in Q1 FY23) VSTT
has digitised its entire network in the rural markets and is now selling electric pumps in two key
markets of UP, Bihar and other few markets. In the near future, the management expects to sell
small power weeders of 2HP and 3HP to earn more customer focus through digital distribution
platform. Although the distribution network is separate for tillers, tractor and spares, some
spares like the brush cutters and oil pumps which are high on demand are available for sale
through the entire distribution network chain to enhance the sales further. VSTT currently has
687 tiller dealers and 380 tractor dealers across the country with major presence in South, West
and East. The company plans to aggressively expand their presence in the North through launch
of higher horsepower tractors.
Export revenues expected to double over next 3-4 years
The company is planning to nearly double its exports revenue from 5-6% now to 10% over the
next three-four years, as it sees a large market opportunity for its compact tractors in Europe.
Its shipments to Europe are growing and it expects exports to expand further to countries like
France, Germany, Spain, Portugal, Belgium, and the Netherlands. The company has entered
into an agreement with ETG (Export Trading Group), for distribution of its tractors, power tillers,
power reapers and diesel engines in the Southern African markets, including South Africa,
Namibia, Botswana, Zimbabwe, Swaziland, and Zambia. Exports have grown by a whopping
50% in H1 FY24.
Strong profitability, earnings growth and balance sheet strength
VSTT is virtually debt-free and is expected to generate strong free cash flows (FCF) going
forward. For FY24 and FY 25, the company would have Capex requirement of ₹500 mn each
year. The company is expected to grow business with internal accruals and are evaluating any
inorganic opportunities as well. Earnings are expected to grow strongly at 34% CAGR over FY23-
26E, led by 27% revenue CAGR and a 200bps improvement in EBITDA margin in the mentioned
period. Margins are expected to rise on the back of price hikes which are due on both tillers
and tractors over the past quarter to take care of the rising commodity costs. With input costs
remaining stable and volumes on the tillers side increasing, higher operating leverage should be
seen. The launch of higher HP Zetor tractors shall help the company to post higher margins as
well in FY 25-26 as the volumes grow. Going forward, VSTT will be more focused on increasing
market share through niche product development, a wider distribution network, and brand-
building exercises. We remain positive on the rural economy over mid to long term and expect
VSTT to be a key beneficiary.

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 VST TILLERS TRACTORS LIMITED

Sales Vs Sales Growth EBITDA Vs EBITDA margins

Total Sales (Rs mn) % Growth EBITDA (Rs mn) EBITDA margins (%)

14.6%
41% 13.8% 2,989
13.3%
12.1% 12.6%
29% 30%

21% 2,174
18%
12% 1,619
1,272

922
3.2%
-12%
175
5,437 7,642 8,539 10,064 12,173 15,753 20,474

FY 20 FY 21 FY 22 FY 23E FY 24E FY 25E FY 26E FY 20 FY 21 FY 23 FY 24E FY 25E FY 26E

Source: LKP Research Source: LKP Research

PAT Vs PAT Margin ROE (%) Vs ROCE (%)

PAT (Rs mn) PAT margin (%) ROCE ROE

2,212
11.9% 20.6%
10.8%
10.2%
9.3% 16.8%
9.2% 1,599
18.1%
13.8%
12.6% 15.3%
13.6% 11.5%
1,133
924 10.6%
908 12.4%
11.2%

3.3%

180 5.0%

FY 20 FY 21 FY 23 FY 24E FY 25E FY 26E FY 20 FY 21 FY 23 FY 24E FY 25E FY 26E

Source: LKP Research Source: LKP Research

Risks and concerns

High correlation with monsoons: The tractor industry volume growth has a high correlation
with the deviation of monsoons from their long-term average. Any significant deviation
(especially back-to-back in two years) resulting in weak monsoons could lead to a sharp decline
in the industry’s growth. Unseasonal rains in FY 24, cyclones and monsoon deficit of 94.4% may
hurt demand this fiscal.
Dependence on government subsidy for power tillers: Subsidy has been one of the main
drivers of growth of power tillers, however off late it has reduced. But, still some farmers are
still dependent on subsidies. Delay in government doling out subsidies may lead to a risk for
the company.
Huge competition in higher HP tractors: The tractor industry consists of many small and big
players, thereby the company faces high competition in tractor industry. This may result in
pressure on margin and profitability.
Removal of import license : The government has imposed curbs on tiller imports by moving it
to restricted items (requiring a license to import) from free. Reversal of this policy could impact
market share of VSTT as Chinese imports are relatively cheaper.

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VST TILLERS TRACTORS LIMITED

Outlook and Valuation

VSTT is well-positioned to maintain its dominant market share in the power tiller market. Market
share gains driven by new product launches across brands would increase the company’s
addressable market. In addition, the company is strengthening its distribution network across
the country. The company has technological tie-ups with Pubert (France) and Zetor (Czech
Republic) for product development. VST Tillers has invested in California, US-based Zimeno Inc,
a manufacturer of driver optional born electric tractors under the Monarch brand.

Tiller volumes have been showing a robust growth over last few years on the back of strong
monsoon performance (till CY 22), demand for small farm mechanisation, shortage of labour,
subsidy for small farmers and increase in small farm lands under cultivation. VSTT’s leadership
in compact tractors also offers it a strong position to develop further with partnerships like the
one with Zetor for manufacturing higher HP tractors. This would expand its presence in the
North. Innovations in the other products like the power weeders and brush cutters too should
augur well for the company. Zero debt, high return ratios, improving capacity utilizations,
improving margins all lends comfort to the investors. Management has given a optimistic
revenue target of ₹30 bn revenues in FY26, however we believe it is a difficult task, but we still
build in a 27% topline CAGR in the period between FY23-26E. The stock is trading close to its
historical average, at P/E multiple of 14x on its FY26E estimates. Therefore we believe the stock
looks attractive from current levels with a target price of 4,608 which is 28% upside.

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 VST TILLERS TRACTORS LIMITED

Income Statement Balance Sheet

(₹ mn) FY 23 FY 24E FY 25E FY 26E (₹ mn) FY 23 FY 24E FY 25E FY 26E
Total Revenues 10,064 12,173 15,753 20,474 Equity and Liabilities
Raw Material Cost 7,047 8,327 10,712 13,800 Equity Share Capital 86 86 86 86
Employee Cost 791 1,010 1,292 1,638 Reserves & Surplus 8,158 9,064 10,344 12,113
Other Exp 955 1,217 1,575 2,047 Total Networth 8,244 9,151 10,430 12,199
EBITDA 1,272 1,619 2,174 2,989 Deferred tax assets/liabilities 25 20 20 20
EBITDA Margin(%) 12.6% 13.3% 13.8% 14.6% Other curent liabilities 431 438 458 478
Depreciation 269 296 345 369 Total non-current liab and provs 457 458 478 498
EBIT 1,003 1,323 1,829 2,620 Current Liabilities
EBIT Margin(%) 10.0% 10.9% 11.6% 12.8% Trade payables 1,307 1,401 1,942 2,636
Other Income 250 280 300 320 Short term provisions+ borrowings 70 52 52 52
Interest 13 20 25 30 Other current liabilities 829 859 889 919
PBT 1,240 1,583 2,104 2,910 Total current liab and provs 2,207 2,312 2,884 3,608
PBT Margin(%) 12.3% 13.0% 13.4% 14.2% Total Equity & Liabilities 10,908 11,921 13,792 16,305
Tax 316 450 505 698 Assets
Adjusted PAT 924 1,133 1,599 2,212 Net block 2,287 2,490 2,646 2,627
APAT Margins (%) 9.2% 9.3% 10.2% 10.8% Capital WIP 141 200 225 250
Exceptional items 0 0 0 0 Other non current assets 1,235 1,427 1,627 1,827
PAT 924 1,133 1,599 2,212 Total fixed assets 3,662 4,117 4,497 4,703
PAT Margins (%) 9.2% 9.3% 10.2% 10.8% Cash and cash equivalents 281 417 973 2,055
Inventories 1,079 1,601 1,899 2,356
Trade receivables 1,492 1,134 1,511 2,019
Key Ratios
Other current assets 961 1,021 1,081 1,141
YE Mar FY 23 FY 24E FY 25E FY 26E
Total current Assets 7,245 7,804 9,295 11,602
Per Share Data (Rs)
Total Assets 10,908 11,921 13,792 16,305
Adj. EPS 106.9 131.1 185.1 256.0
CEPS 138.1 165.4 225.0 298.7
BVPS 954.3 1059.2 1207.2 1412.0 Cash Flow
DPS 21.4 26.2 37.0 51.2
(₹ mn) FY 23 FY 24E FY 25E FY 26E
Growth Ratios(%)
PBT 1,240 1,583 2,104 2,910
Total revenues 17.9% 21.0% 29.4% 30.0%
Depreciation 269 296 345 369
EBITDA 2.0% 27.3% 34.3% 37.5%
Interest 11 20 25 30
EBIT 0.6% 31.9% 38.3% 43.2%
Chng in working capital -692 -40 -103 -241
PAT -7.0% 22.6% 41.2% 38.3%
Tax paid -301 -450 -505 -698
Valuation Ratios (X)
Other operating activities -164 155 0 0
PE 33.6 27.4 19.4 14.0
Cash flow from operations (a) 364 1,564 1,866 2,369
P/CEPS 26.0 21.7 16.0 12.0
Capital expenditure -242 -559 -525 -375
P/BV 3.8 3.4 3.0 2.5
Chng in investments -133 -400 -400 -400
EV/Sales 3.1 2.5 1.9 1.4
Other investing activities 57 -50 -40 -40
EV/EBITDA 24.3 18.9 13.8 9.7
Cash flow from investing (b) -316 -1,009 -965 -815
Operating Ratios (Days)
Free cash flow (a+b) 49 555 901 1,554
Inventory days 56.0 48.0 44.0 42.0
Dividend paid (incl. tax) -173 -227 -320 -442
Recievable Days 32.0 34.0 35.0 36.0
Interest paid -11 -20 -25 -30
Payables day 40.0 42.0 45.0 47.0
Other financing activities 0 0 0 0
Profitability Ratios (%)
Cash flow from financing (c) -191 -247 -345 -472
ROCE 11.5% 13.8% 16.8% 20.6%
Net chng in cash (a+b+c) -143 309 556 1,082
ROE 11.2% 12.4% 15.3% 18.1%
Closing cash & cash equivalents 108 417 973 2,055
Dividend payout ratio (%) 20.0% 20.0% 20.0% 20.0%

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 AUTO ANCILLARIES | Sector Update

DISCLAIMERS AND DISCLOSURES

LKP Sec. ltd. (CIN-L67120MH1994PLC080039, www. Lkpsec.com) and its affiliates are a full-fledged, brokerage and financing group. LKP was established in 1992 and
is one of India's leading brokerage and distribution house. LKP is a corporate trading member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of
India Limited(NSE), MCX Stock Exchange Limited (MCX-SX).LKP along with its subsidiaries offers the most comprehensive avenues for investments and is engaged in the
businesses including stock broking (Institutional and retail), merchant banking, commodity broking, depository participant, insurance broking and services rendered in
connection with distribution of primary market issues and financial products like mutual funds etc.

LKP hereby declares that it has not defaulted with any stock exchange nor its activities were suspended by any stock exchange with whom it is registered in last five years.
However, SEBI and Stock Exchanges have conducted the routine inspection and based on their observations have issued advice letters or levied minor penalty on LKP for
certain operational deviations in ordinary/routine course of business. LKP has not been debarred from doing business by any Stock Exchange / SEBI or any other authorities;
nor has its certificate of registration been cancelled by SEBI at any point of time.

LKP offers research services to clients. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the
subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations
or views expressed in this report.

Other disclosures by LKP and its Research Analyst under SEBI (Research Analyst) Regulations, 2014 with reference to the subject company(s) covered in this report-:

Research Analyst or his/her relative’s financial interest in the subject company. (NO)

LKP or its associates may have financial interest in the subject company.

LKP or its associates and Research Analyst or his/her relative’s does not have any material conflict of interest in the subject company. The research Analyst or research entity
(LKP) has not been engaged in market making activity for the subject company.

LKP or its associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of
publication of Research Report.

Research Analyst or his/her relatives have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding
the date of publication of Research Report: (NO)

LKP or its associates may have received any compensation including for investment banking or merchant banking or brokerage services from the subject company in the
past 12 months.

LKP or its associates may have received compensation for products or services other than investment banking or merchant banking or brokerage services from the subject
company in the past 12 months.

LKP or its associates may have received any compensation or other benefits from the Subject Company or third party in connection with the research report.

Subject Company may have been client of LKP or its associates during twelve months preceding the date of distribution of the research report and LKP may have co-
managed public offering of securities for the subject company in the past twelve months.

Research Analyst has served as officer, director or employee of the subject company: (NO)

LKP and/or its affiliates may seek investment banking or other business from the company or companies that are the subject of this material. Our salespeople, traders, and
other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed
herein, and our proprietary trading and investing businesses may make investment decisions that may be inconsistent with the recommendations expressed herein.

In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest including but not
limited to those stated herein. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material
is provided herein. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality,
state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject LKP or its group
companies to any registration or licensing requirement within such jurisdiction. Specifically, this document does not constitute an offer to or solicitation to any U.S. person
for the purchase or sale of any financial instrument or as an official confirmation of any transaction to any U.S. person.

Unless otherwise stated, this message should not be construed as official confirmation of any transaction. No part of this document may be distributed in Canada or used
by private customers in United Kingdom.

All trademarks, service marks and logos used in this report are trademarks or registered trademarks of LKP or its Group Companies. The information contained herein is not
intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading, dissemination, distribution or copying of this communication
is prohibited unless otherwise expressly authorized. Please ensure that you have read “Risk Disclosure Document for Capital Market and Derivatives Segments” as prescribed
by Securities and Exchange Board of India before investing in Indian Securities Market. In so far as this report includes current or historic information, it is believed to be
reliable, although its accuracy and completeness cannot be guaranteed.

All material presented in this report, unless specifically indicated otherwise, is under copyright to LKP. None of the material, nor its content, nor any copy of it, may be
altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of LKP.

LKP Securities Ltd, 2nd Floor, Gala Impecca, Andheri Kurla Road, Near Hotel Courtyard Marriott, Chakala, Andheri (East), Mumbai-400059.
Tel -91-22 - 66351234. Email: [email protected], web: www.lkpsec.com