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Precision Camshafts Limited IPO Views - 28th Jan 2016

Auto Ancillary | Published on Jan 27th 2016

IT

Amongst largest camshaft player with long term client relationship PCL is one of the world’s leading manufacturers and suppliers of passenger vehicle camshafts producing about 150 different varities. Over the last five years, PCL has almost doubled its market share and currently commands about 8-9% of the global passenger vehicle camshaft market. PCL has developed long term relationship of over 10 years with global OEM’s and, is the preferred supplier with General Motors, Ford Motors, Hyundai, Maruti Suzuki and Tata Motors. Increased outsourcing of machining by OEM’s coupled with new plant to trigger growth: There is a growing trend of outsourcing camshaft machining amongst the global OEM’s. As per the industry estimates, currently ~35% of camshafts are machined in house by the OEM’s. Given the high capex involved in setting up the machining facilities (machining typically has asset turnover of 1x), OEM’s are increasingly outsourcing the machining operations. Further, the proposed new ductile iron camshaft machining plant would broaden the product profile for PCL. Investment concern: Currency risks and client concentration: PCL derives about 80% of revenues from exports with Euro and GBP constituting major revenue currencies thus exposing it to risk of adverse currency movement. Further, General Motors and Ford form about 35% of the revenues each leading to client concentration. Outlook and Valuation: PCL return ratios are likely to be impacted over the next two years on account of raising of capital and low capacity utilisation of the plant initially. Further PCL is exposed to currency risks and higher client concentration. On the price to earnings per share (EPS; post-IPO) front, the company is valued at 25.8x 1HFY2016 annualized numbers, while a larger and more diversified player in a similar business, Bharat Forge is trading at a similar multiple of 25.1x FY2016 estimated numbers despite better ROE. Also, another player in forgings business like Ramkrishna Forgings with a better ROE is trading at steep discount to PCL. Further, PCL is trading at a higher EV/Sales multiple of 3.6x as compared to 2.7x and 2.2x of Bharat Forge and Ramkrishna Forgings respectively despite competitors having diverse product profile and far bigger size as compared to PCL. Hence we recommend Neutral on the issue given the expensive valuations.

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