The CUB Series - Edelweiss volume growth 0.0 0.1 0.1 0.2 0.2 0.3 0.3 0.4 0.4 0.5 03 04 05 06 07 08...

The CUB Series

“Catch the CUB before it roars like a Lion”

Jamna Auto Inds. Ltd Initiating Coverage (CMP INR 230)

November 2015

Debashish Mazumdar Research Analyst +91-22-4088 5819 [email protected]

Edel Invest Research

The CUB Series

We initiate coverage on Jamna Auto Industries Ltd. as part of our ‘CUB’ series. Under the ‘CUB’ series banner, we are covering small-cap companies with robust long-term growth potential. Our endeavour is to recommend small-cap companies that are not widely covered. Despite low liquidity and small size of business, these companies have strong long-term fundamentals and sustainable structural growth drivers.

In our view, investment themes in equity markets play out over the long-term with potential pay-offs taking time to materialize. By introducing the CUB series our objective is to identify quality small-cap companies in the early stages of their growth cycle.

Some of the key attributes of CUB series stocks are as under:

Small-cap companies with robust long-term growth potential

Steady cash flows, healthy balance sheets and high return ratios

Good corporate governance

Not widely covered and liquidity could be an issue

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Jamna Auto Inds. Ltd CMP: INR 230 Target Price: INR 282

Jamna Auto Industries Ltd. (JAI) is a market leader in the CV suspension leaf spring segment (90% of sales), including products like the conventional leaf spring and parabolic leaf spring. JAI currently has a 64% market share in the conventional leaf springs segment and a market leader in the parabolic leaf spring segment. Being the industry leader makes JAI a key beneficiary of the ongoing domestic MHCV cycle recovery. The company is focused on capturing the rising content-per-vehicle trend and hence it has forayed into the Air Suspension and Lift Axle segments (10% of consolidated sales) where its main client is Ashok Leyland for the heavy tonnage trucks. JAI’s management has outlined a ‘33%-Rule’ to be applied on five key parameters with an objective to de-risk the business (through operational diversification), thereby improving overall profitability. We believe that the company is an attractive investment considering its strong topline growth (spurred by MHCV cycle recovery) with market-share gain in the conventional product segment, higher content addition from new products and increased penetration into the after-market segment. Improvement in capacity utilization, reduction in plant breakeven levels and increasing mix of high-margin products will help drive profitability going forward. The stock is currently trading at 19.7x/11.2x FY16E/FY17E earnings. We have a Buy rating on the stock with a target price of INR 282.

Investment Theme

Key beneficiary of the MHCV cycle recovery

Competitive dominance through customer proximity and cost efficiency

Content addition and end-market diversification to enhance sales visibility

Management outlines ‘33% Rule’ across 5 parameters

Target (INR) 282

Upside/downside (%) 23

Rating Buy

CMP 230

52 week high/low 275 / 129

Market cap (INR crore) 928

Avg. Daily Vol (‘000) 318

Bloomberg code JMNA IS Equity

Industry Auto-Component

Promoter Jauhar Family

Corporate Office Delhi

Auditors S R Batliboi & Co LLP

Credit rating “A” Rated

Sep-15 Jun-15 Mar-15

Promoter 43.81 43.81 43.81

FII 0 0.65 0.66

DII 0.37 0.29 0.31

Others 55.82 55.25 55.11

Source: Edel Invest Research.

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Jamna Sensex

Financials (INR Cr) FY13 FY14 FY15 FY16E FY17E

Net revenue 980 834 1,095 1,280 1,528

EBITDA 86 44 94 118 177

Adjusted PAT 28 2 29 46 81

Diluted EPS (Rs) 6 0.4 7 12 21

Diluted P/E (x) 35.6 624.2 31.0 19.7 11.2

EV/EBITDA (x) 16.1 79.7 10.2 8.2 5.4

ROAE(%) 17% 1% 16% 22% 32%

ROCE(%) 23% 7% 25% 32% 45%

Investment Rational

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Jamna Auto: A key beneficiary of Indian MHCV cycle recovery

Domestic MHCV industry is in a recovery mode post a 2-year downturn

● The MHCV industry in India has declined on an average by ~20% YoY every quarter between Q1FY13 and Q1FY15. Slowdown in overall demand, ban on mining activity and lack of infrastructure build-up had a detrimental effect on MHCV industry volumes during this period.

● However, since Q2FY15, recovery is visible in the MHCV industry, aided by a modest revival in the overall economic activity, government’s thrust on increased infrastructure spending and lifting of curbs on mining activity.

● Rising freight rates on the back of higher fleet utilization and benign diesel prices have improved the profitability for fleet owners; this, in turn has emerged as an added impetus to MHCV demand. Between Q2FY15 and Q2FY16, the MHCV industry has registered an average quarterly growth of 37% YoY.

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MHCV Industry volume declined by ~20% YoY per quarter, between Q1FY13 & Q1FY15

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Source: Edel Invest Research, Industry, Bloomberg.


Improving fleet utilization to drive MHCV industry sales going forward

● The industrial growth recovery in India started to re-gain traction from H2FY14. The Mining Index in the IIP started showing positive YoY growth from Q3FY14 after posting a nine-quarter decline.

● On the back of improved economic activity, MHCV fleet utilization levels have also increased from 50-60% as of January 2015 to ~75-80% currently.

● Going forward, improving fleet utilization levels and increasing profitability will enable MHCV industry to register a ~20% YoY growth in both FY16 and FY17.

● By FY18E, we expect the MHCV industry to return to peak sales run-rate of 3,80,000 units (registered in FY12), implying a 14% CAGR growth between FY15 and FY18E.

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Increase in Fleet owner’s profitability to drive MHCV Industry volume growth

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Improving Fleet Owner Profitability to Drive MHCV Volume Growth

MHCV Industry Volume Run-rate

Freight Rate per 9-Tonne Payload to Diesel Price per Litre Ratio (RHS)



Jamna Auto (JAI) is the market leader in the domestic CV suspension spring industry

● JAI is the market leader in the conventional leaf spring and parabolic spring segments for the domestic commercial vehicle (CV) industry. Therefore, it is expected to be the biggest beneficiary of the domestic MHCV cycle recovery. It has a 64% market share in the OE leaf spring segment. The remaining market share is accounted by other multiple small competitors.

● With regard to parabolic leaf springs, JAI is the market leader with only one other notable competitor having indigenous manufacturing capability.

● Over the years, JAI’s considerable market share has enabled it to attain a significant scale in terms of supplies to MHCV players. However, this enhanced exposure to the highly cyclical MHCV industry impacted sales, especially during the MHCV downturn between Q1FY13 and Q1FY15. JAI’s sales witnessed an average 11% YoY decline versus an average 20% YoY fall in the overall MHCV industry.

● JAI’s EBITDA margin contracted to 1% in Q3FY14 - peak of the MHCV downturn. But, EBITDA margin currently stands at 10.5% for H1FY16 post the recovery in the overall CV industry.

● To offset the detrimental effect of the MHCV industry’s cyclicality on profitability, JAI is looking to lower the breakeven utilization from 50% currently to ~33%. This implies that at a capacity of 180,000 MT per annum, breakeven will be achieved at a saleable tonnage of 5,000 MT per month versus 7,500 MT per month currently.

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MHCV industry trend impacts JAI's sales and profitability

MHCV Industry Volume Growth (LHS) JAI Net Sales YoY % Change (LHS) JAI Core EBITDA Margins (RHS)

JAI’s sales growth has declined less than the Industry during the MHCV downturn

JAI’s sales growth has majorly surpassed Industry growth during the MHCV-recovery trend

Source: Company, Industry, Edel Invest Research

Jamna Auto: Maintains dominance through Customer Proximity and Cost efficiency

Customer proximity to aid market leadership

● The leaf spring industry in India is largely a commoditized business and prone to cyclicality from the CV segment. Hence, customer proximity through multiple-location manufacturing, and cost-efficiency to manage end-segment cyclicality are imperative for a strong competitive positioning. JAI presently has six facilities in close proximity to major CV manufacturing hubs in India. It is in the process of adding capacity at their facility at Hosur, in Karnataka.

● Over the years, JAI has gradually gained market share in the domestic leaf spring industry. The company’s share currently stands at 64% compared to a 40% market share in FY10-FY11.

● The establishment of multi-location manufacturing facilities to achieve scale entails significant capital expenditure and is thus a major deterrent for new players. We understand that, historically, several companies have tried to set up similar facilities but have been largely unsuccessful.

JAI’s manufacturing facilities located near major domestic OEM hubs Proximity to customer has aided JAI’s market share gain

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Source: Company, Industry, Edel Invest Research

Jamna Auto 64%

Other Competitors

36%

Jamna Auto: Maintains dominance through Customer Proximity and Cost Efficiency

Strategically located facilities help achieve scale and prune costs

● Besides customer proximity, cost efficiency is the second biggest parameter required to remain competitive in the commoditized leaf spring industry. JAI’s facilities are located close to its raw material suppliers.

● Steel supplier depots are present outside most of JAI’s facilities, allowing the company to be more efficient with regard to its inventory management.

● The strategic location of the company’s six production facilities has helped it minimize freight expenses. According to management, the multi-location presence results in freight expense savings of 3% of sales, which otherwise would have stood at 7% of sales.

● Apart from freight cost benefit, presence at multiple locations allows companies like JAI to maintain share of business with OEMs despite production shifts between various customer plant locations, without significant incremental capex. Additionally, there is better quality control for suppliers whose plants are located close to their OEM customer facilities. This helps to lower internal and customer level rejections.

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Despite progressive reduction in creditor days since FY09, JAI has maintained working capital efficiency

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JAI's strategic plant locations enables prudent inventory management

RM Inventory Days Finished Goods Inventory Days

Source: Company, Edel Invest Research.

Jamna Auto: Content addition and end-market diversification to enhance sales visibility

Transition to parabolic leaf springs likely to boost realization and expand gross margins

● Notwithstanding the CV cycle recovery, JAI is also focusing on: (i) increasing value-added content, and (ii) greater after-market penetration to provide further impetus to its sales going forward.

● Globally, apart from Japan (whose CVs are largely fitted with conventional leaf springs), parabolic leaf spring has a significant presence in Europe and the USA at 100% and 80%, respectively. In India, Tata’s highest selling LCV “Ace” is fitted with parabolic leaf springs while the Tata LPT 2518 and the Tata LPS 4018 have their front suspensions fitted with parabolic leaf springs. Further, of the overall new-product-development underway in the CV industry, 55% are to be fitted with parabolic leaf springs. As per the JAI management, foreign OEMs such as Daimler and VECV are in favor of parabolic leaf springs instead of convention leaf springs.

● JAI expects a growing shift towards parabolic leaf springs from the conventional leaf springs in the CV space. Parabolic leaf springs have 25% higher realization versus conventional leaf springs. We expect the higher realizations and the lower material usage per unit to result in fatter gross margins compared to the conventional leaf springs segment. However, during the scale-up (i.e. lower material utilization) in parabolic leaf spring production, machinery costs for an additional rolling process is largely expected to result in marginally lower-to-steady-state EBITDA margins and ROCE versus that for the conventional leaf spring division.

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Parabolic leaf spring is beneficial to both user and producer

Jamna Auto: Content addition and end-market diversification to enhance sales visibility

Air Suspensions and Lift Axle segments to add to higher content per vehicle

● Apart from the leaf spring division, JAI has established its presence in the Air Suspension and Lift Axle segments through a technology tie-up with Ridewell of the USA. Air Suspensions and Lift Axles are currently fitted in trucks and multi-axle tractor trailers of >26 tonnes (gross vehicle weight).

● Air Suspension systems provide significant support to the rear axle when the payload is being transported. Further, as the load is cut, the air suspension lifts the axle, reducing wear and tear on the tyres and improving fuel efficiency on account of lower friction with the road surface.

● During FY11-FY15, the share of >26 tonne trucks and multi-axle tractor trailers has increased by 4% i.e. from 10.6% in FY11 to 14.4% in FY15.

● Currently, 100% of JAI’s Air Suspension and Lift Axle division sales are going to Ashok Leyland while its competitor Hendrickson supplies similar products to Tata Motors. The sales mix of >26 tonnes CVs for Ashok Leyland has increased to 35% in FY15 from 32% in FY11 while for Tata Motors, the same has decreased to 61% in FY15 from 64% in FY11.

● We believe that the shift towards higher tonnage and multi-axle vehicles is a structural trend for the Indian CV industry. The key benefit of using multi-axle vehicles as opposed to a dual-axle vehicle is that the former provide 80% higher load haulage capacity at 20% higher capital and operational expenses.

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Major sales mix shift to higher tonnage & multi- axle CVs in FY15

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Ashok Leyland major market share gainer in high tonnage & multi-axle CV segment

Ashok Leyland (> 26 tonne vehicles) Tata Motors (> 26 tonne Vehicles)


Introduction of GST to usher in significant domestic aftermarket opportunity

● Apart from the CV cycle recovery, the domestic after-market provides a considerably large opportunity for JAI. Leaf springs on average have a short life span owing to overloading and poor road conditions. The replacement market is distribution focused, price sensitive and high margin. The leaf spring after-market segment is highly fragmented with a majority of the supply being catered to by unorganized players while organized players cater to only ~10% of the overall sales in this market. Leaf spring replacement sales currently contribute ~18% to JAI’s overall revenues.

● JAI is aggressively pursuing expansion in the after-market segment. JAI has tied-up with more than 1,310 primary dealers with an objective to enhance its reach through 3,500 dealers. The company has established a strong distribution network in the northern and western parts of India and is currently in the process of strengthening its presence in the eastern and southern regions.

● At present, unorganized players are able to supply products in the after-market segment at a 30% discount to the organized players. According to JAI’s management, the unorganized players can maintain this lower price differential on account of their lower tax expense outgo. Implementation of the Goods & Services Tax (GST) will bring these unorganized players into the tax purview, resulting in reducing the viability of their lower pricing versus the organized players.

● Assuming a 7-year replacement cycle by fleet operators, the total MHCV population in India is ~8x higher than the annual OEM volumes sold. Considering that the after-market realization is ~35% lower than the OEM segment’s realization, the overall after-market opportunity for MHCV leaf springs could be ~4 times the MHCV OEM industry value.

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Management targeting 33% Rule for 5 parameters

● Going forward, JAI’s management has outlined a ‘33%-Rule’ to be applied on five key parameters. These parameters include 33% contribution from new segments & new products, lowering of plant break-even level to 33%,a continued dividend payout of 33% and an ROCE of 33%.

● Adherence to these targets would result in lower cyclicality in sales and improved profitability for the company.

● Management is currently targeting doubling of its revenue over the next three years. Presently (as of FY15), JAI is operating at a utilization level of 70%; we expect improved recovery in the MHCV cycle and the greater after-market penetration to drive sales growth going forward.

● For FY16, JAI plans to spend INR 100 crore on capex, of which INR 75 crore will be spent to set up the 36,000 MT leaf spring capacity at Hosur in Karnataka, dedicated largely toward exports. Additionally, higher utilization as well as management’s efforts to cut fixed costs will likely result in better EBITDA margin which currently stands at 10.4% (as of H1FY16).

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Financial Analysis

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Through FY15-17E,Revenue to grow at 18% CAGR; operating leverage to drive profitability

• Backed by MHCV recovery, JAI has reported 31% YoY revenue growth in FY15. In the first half of FY16, the company has already reported 29%YoY topline growth.

• Going forward, we expect the revenue of the company to grow at 18% CAGR over FY15 – 17E to reach INR 1528 cr. Market share gain in the leaf spring segment , higher content addition from new products and increased penetration into the after-market segment is expected to drive the revenue growth.

• Improvement in capacity utilization and reduction in plant breakeven levels will lead to operating leverage, eventually resulting in higher profitability. We believe, EBITDA margin of the company will move back to its historical peak of approximately 12% in FY17E (historical peak margin achieved in FY11).

• Considering the improving profitability, sustainable incremental asset turn and working capital cycle; we believe the company will achieve a ROCE of 45% in FY17E as against 25% in FY15.

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JAI’s revenue to grow at 18% CAGR FY15-17E Operating Leverage to be a primary driver of profitability


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Operating cash-flow generation to fund JAI’s Capex requirement Reducing Net Debt ; Incremental capex from internal accruals

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Operating Leverage to be a primary driver of profitability


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Valuation & Recommendation

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Initiating coverage with ‘BUY’ Rating for a Target Price of 282

Valuations

● We expect a Sales/PAT growth CAGR of 18%/66% between FY15-FY17E on account of significant topline growth owing to MHCV cycle recovery, market share gain, higher content addition and increased penetration into the after-market segment. Improvement in capacity utilization and reduction in plant breakeven levels will lead to operating leverage, eventually resulting in higher profitability. At the CMP of INR 230, we value the stock at 19.7x/11.2x FY16E/FY17E earnings. We initiate coverage with ‘BUY’ rating on the stock with a target price of INR 282 (i.e upside potential of 23% plus dividend pay-out of 33%).

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Source: Edel Invest Research, Bloomberg.

Risks

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Jamna Auto : Risks

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Key Risks

End-segment concentration risk: JAI is a CV suspension component supplier with ~95% of revenue driven by the highly cyclical domestic MHCV Industry. A slowdown in the MHCV industry volume will affect the company’s sales.

Delay in GST implementation: Currently ~90%+ of the leaf spring after-market is catered to by unorganized manufacturers. Delayed implementation of GST would limit JAI’s sales growth from the after-market segment.

Steel price pass-through: Majority of JAI’s raw material expense is incurred on steel. JAI has a pass-through arrangement with its customers with regard to steel prices. Steel price pass-through will lower JAI’s realization and put pressure on its gross margins.

Business Overview

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Jamna Auto: Business Overview

OEM opportunity headroom -JAI sales are currently 0.4x global leader Rassini

Despite significant difference in scale, JAI has achieved margins similar to global leader Rassini

● Jamna Auto Industries Ltd. (JAI) is the market leader in the suspension leaf spring industry in India.

● JAI has a 64% market share in the OE conventional leaf spring segment, while the overall leaf spring segment accounts for 87% of its consolidated sales. The company is also the market leader in the parabolic leaf spring segment, which contributes 3% to consolidated sales.

● In terms of leaf spring capacity, JAI is the third largest player globally with a capacity of 180,000 MT, trailing Rassini of Mexico (225,000 MT) and Hendrickson of Canada (190,000 MT). The company has forayed into Air Suspension and Lift Axle segments through its technological tie-up with Ridewell, USA. This segment currently constitutes the remainder of the consolidated sales with the major customer for this segment being Ashok Leyland.

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Hendrickson (Leaf Springs Division)

Jamna Auto

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Global Comparison


Jamna Auto : Product Segments

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Conventional leaf springs constitute multiple layers of arc-shaped steel strips which form a part of the suspension system of most domestic commercial vehicles in India and are used to hold the axle in position. The presence of multiple layers (or leaves) increases the weight and friction between the leaf layers and reduces riding comfort. Parabolic leaf springs perform the same function as that of conventional leaf springs but with a lower number of leaf layers, resulting in lower weight and better riding comfort. The reduced weight allows for greater tonnage carrying capacity without compromising fuel efficiency, and better riding comforts and increases the life of CV suspension systems.

Jamna Auto Inds Ltd: Financial Overview

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Financial Statements

Year to March (INR Cr) FY13 FY14 FY15 FY16E FY17E

Net revenue 980 834 1,095 1,280 1,528

Materials costs 645 563 735 849 996

Gross profit 336 271 360 431 532

Employee costs 60 60 69 86 95

Manufacturing exp 127 107 137 159 183

SG&A 63 59 59 69 76

EBITDA 86 44 94 118 177

Depreciation & Amortization 29 26 31 37 44

EBIT 57 18 63 81 133

Other income 2 10 2 1 1

EBIT incl. other income 59 28 65 82 134

Interest expenses 27 24 18 13 13

Profit before tax 32 4 47 69 121

Provision for tax 4 3 18 23 40

Adjusted Profit 28 2 29 46 81

Minority interest - - - - -

Adjusted Profit after minority 28 2 29 46 81

Extraordinary income/ (loss) 0 (12) 0 - -

Net profit after minority 28 14 29 46 81

Basic shares outstanding (crs) 4.3 4.1 4.0 4.0 4.0

EPS (Rs.) 6.5 0.4 7.4 11.7 20.5

Dividend per share (Rs.) 1.8 1.0 2.2 3.5 6.2

Dividend payout (%) 28% 260% 30% 30% 30%

Common size metrics ‐ as % of net revenues

Year to March FY13 FY14 FY15 FY16E FY17E

Materials costs 65.8% 67.5% 67.1% 66.3% 65.2%

Employee expenses 6.1% 7.2% 6.3% 6.7% 6.2%

Manufacturing exp 12.9% 12.9% 12.5% 12.4% 12.0%

SG&A 6.4% 7.1% 5.4% 5.4% 5.0%

Depreciation 3.0% 3.1% 2.8% 2.9% 2.9%

EBITDA margins 8.7% 5.3% 8.6% 9.2% 11.6%

EBIT margins 5.8% 2.2% 5.8% 6.3% 8.7%

Adj profit margins 2.8% 0.2% 2.7% 3.6% 5.3%

Net profit margins 2.8% 1.7% 2.7% 3.6% 5.3%

Growth ratios (%)


Revenues -12.5% -14.9% 31.3% 16.9% 19.4%

EBITDA -14.7% -48.1% 112.8% 24.6% 50.5%

PBT -40.0% -86.4% 982.6% 45.4% 76.1%

Adj profit -37.8% -94.5% 1835.5% 57.0% 76.1%

Net profit -34.3% -50.1% 112.3% 57.2% 76.1%

Balance sheet

As on 31st March FY13 FY14 FY15 FY16E FY17E

Equity capital 43 41 40 40 40

Reserves & surplus 132 140 157 186 238

Minority Interest - - - - -

Borrowings 166 125 64 64 64

Deffered tax 16 15 16 16 16

Sources of funds 357 322 277 306 358

Gross Block 463 467 479 579 679

Accumulated Depreciation 198 208 237 274 318

CWIP 17 2 8 8 8

Net Fixed Assets 283 262 250 313 369

Investments - - - - -

Inventories 132 101 109 193 230

Sundry debtors 107 108 56 105 126

Cash and equivalents 20 14 11 23 29

Loans and advances 60 55 70 75 82

Total current assets 319 278 246 396 466

Sundry creditors and others 227 207 203 386 461

Provisions 18 11 17 17 17

Total current l iabilities & provisions 245 217 220 403 477

Net current assets 74 60 27 (7) (11)

Uses of funds 357 322 277 306 358

Book value per share (INR) 40.6 44.0 49.6 57.0 70.1

Free cash flow


Net profit 28 14 29 46 81

Add : Depreciation 29 26 31 37 44

Others 7 -4 -2 -1 0

Gross cash flow 64 36 58 83 125

Add: Changes in WC 0 10 17 45 10

Operating cash flow 87 45 98 140 147

Less: Capex 33 6 23 100 100

Free cash flow 54 39 75 40 47

Cash flow metrics


Cash flow from operations 87 45 92 140 147

Cash Flow from investing activities -32 24 -22 -99 -99

Casf Flow from financing activities -55 -66 -78 -30 -42

Capex -33 -6 -23 -100 -100

Dividends -12 -10 -5 -17 -30

Profitability & efficiency ratios


ROAE (%) 17% 1% 16% 22% 32%

ROACE (%) 23% 7% 25% 32% 45%

ROIC (%) 26% 6% 16% 26% 34%

Inventory day 58 50 42 64 66

Debtors days 40 47 19 30 30

Payable days 99 103 79 129 132

Cash conversion cycle (days) -2 -6 -17 -34 -36

Current ratio 1.30 1.28 1.12 0.98 0.98

Debt/Equity 0.95 0.69 0.33 0.28 0.23

Operating ratios


Total asset turnover 2.77 2.46 3.66 4.40 4.60

Fixed asset turnover 4.35 3.18 4.37 4.68 4.59

Equity turnover 5.93 4.68 5.79 6.06 6.07

Du pont analysis


NP margin (%) 2.8% 0.2% 2.7% 3.6% 5.3%

Total assets turnover 2.77 2.46 3.66 4.40 4.60

Leverage multiplier 2.1 1.9 1.6 1.4 1.3

ROAE (%) 17% 1% 16% 22% 32%

Valuation parameters


Diluted EPS (Rs.) 6.5 0.4 7.4 11.7 20.5

Y‐o‐Y growth (%) -38% -94% 1915% 57% 76%

Diluted PE (x) 35.6 624.2 31.0 19.7 11.2

Price/BV (x) 5.7 5.2 4.6 4.0 3.3

EV/Sales (x) 1.1 1.4 0.9 0.9 0.7

EV/EBITDA (x) 16.1 79.7 10.2 8.2 5.4

Dividend yield (%) 0.8% 0.4% 0.96% 1.52% 2.68%

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