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Setco Automotive Ltd Research Report - 16th Dec 2015

Auto Ancillary | Published on Mar 13th 2015


Setco Automotive Ltd (SAL) who is the market leader in manufacture of MHCV clutches (about 65% market share) is likely to reap rich benefits of upcycle in both the OEM (30% of sales) as well as replacement markets (70% sales). Direct beneficiary of MHCV upcycle After two consecutive years (FY2013 and FY2014) of a steep double-digit decline, the MHCV segment is on course for a cyclical upturn. The uptrend in the MHCV space is clearly visible with the segment reporting a growth of 13% in YTD FY2015 (April 2014 to January 2015) period. We believe the MHCV segment is well poised to maintain the double-digit growth over the FY2015-FY2017 period on account of a) Better economic outlook which is likely to generate freight revenues, b) Firming of freight rates and improvement in fleet operators’ profitability, c) Expected reduction in interest rates which would revive the investment cycle, and d) Budgetary focus to increase road network which would enhance usage of commercial vehicle (CV)s. Setco Automotive (SAL) would be the direct beneficiary of uptick in MHCV demand as it commands 85% market share in the MHCV OEM space, drawing about 30% of its total revenues from the space. Aftermarket and export focus to be growth drivers Improved fleet utilization due to higher freight availability is likely to propel the replacement demand for clutches. SAL previously used to cater to replacement market only through the OEM authorized distribution channels. However, SAL is now teaming up with multi branded distributors (network partners other than the OEM authorised outlets) to independently tap the replacement market. These distribution channels provide huge opportunity as SAL can effectively tap the third and fourth replacement cycle for clutches which are typically done outside the OEM authorized dealerships. We expect SAL to gain further market share in the replacement space and expect the segment to post a CAGR of ~18% over the next two years. Also, SAL is aggressively tapping the export markets in America and Europe. It is into negotiations with overseas OEMs to commence supplies to their authorized aftermarket channels. SAL is already supplying to these OEMs in India and is now aiming to initiate supplies to their overseas arms. We expect exports (contributing about 9% of the revenues) to register a healthy 25% CAGR over the FY2015-FY2017. Outlook and valuation: SAL is likely to clock a 24% CAGR in revenues over the next two years given the improvement in the MHCV OEM space and market share gains in the replacement segment. Also, SAL’s operating margin is also expected to improve by 200bp over the next two years, given the operating leverage, enhanced capacity utilization and procurement of captive castings. Given the healthy top-line growth and margin improvement, SAL is expected to post a robust 49% CAGR in earnings. SAL’s return ratios are also likely to expand due to improved profitability and moderate capex. We initiate coverage on the stock with a Buy recommendation and target price of `286 (based on 15x FY2017E earnings).

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CMP 242
Target Price 286
Investment Period12 Months

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Shareholding Pattern (%)

Public & Others34.0
Grand Total100.0

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