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Reco: Buy
CMP: Rs39
Key points
Company details
Price target:
Rs55
Market cap:
Rs532 cr
52-week high/low:
Rs42/6
NSE volume:
(No of shares)
6.0 lakh
BSE code:
520008
NSE code:
RICOAUTO
Sharekhan code:
RICOAUTO
Free float:
(No of shares)
67.5 cr
Shareholding pattern
Public & Others
43%
Promoters
49%
Bodies
corporate
7%
Divestment of stake in joint venturea game changer: Rico Auto Industries Ltd
(RAIL), one of the largest producers of high-pressure non-ferrous die castings for the
auto sector, has recently divested its 50% stake in a joint venture with FCC Co., Japan
(FCC) for Rs495 crore. The significant cash flow (vis--vis a market capitalisation of
Rs532 crore) could turn out to be a game changer for the company. It will enable RAIL
to deleverage (reduce debt) its balance sheet, significantly lower its interest burden
and result in an exponential growth in its earnings and free cash flow.
Spreading its wings; positioned to benefit from demand revival: With enough
resources coming from the divestment and healthy internal accruals, the company
is comfortably positioned to commission a new manufacturing plant each in Tamil
Nadu (Chennai), Gujarat (Sanand) and Rajasthan (Patherdi). The Chennai and Sanand
facilities are expected to be commissioned in Q4FY2015 while the Patherdi facility
will come on stream in FY2016. A presence in these auto clusters is expected to
help it garner new clients and ride the recovery of demand in the auto sector.
Near-term performance uncertain: With the divestment of the stake in the joint
venture (which accounted for 30% of its revenues in FY2014), the company is likely
to witness a drop in the revenues for this year and possibly the next year. However,
the margin profile would improve and a lower interest burden would boost the
earnings, though the same would materialise only after the company receives the
consideration for the stake sale in the joint venture (scheduled for December 2014).
In the meantime, the quarterly results of RAIL are likely to remain muted.
35
25
Valuations
15
Particulars
Net sales (Rs cr)
Growth (%)
EBITDA (Rs cr)
OPM (%)
PAT (Rs cr)
Growth (%)
FD EPS (Rs)
P/E (x)
P/B (x)
EV/EBITDA (x)
RoE (%)
RoCE (%)
Foreign
1%
Price chart
55
45
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
Price performance
(%)
1m
3m
6m 12m
Absolute 11.8
Relative 10.6
to Sensex
FY2013
1,506.0
0.1
117.3
7.8
(7.6)
n/a
(0.6)
n/a
1.5
8.7
(2.2)
8.0
FY2014
1,480.1
-1.7
148.5
10.0
2.7
n/a
0.2
196.9
1.5
5.9
0.8
9.8
FY2015E*
1,236.8
-16.4
133.3
10.8
28.3
947.6
2.1
18.8
0.8
3.4
5.5
9.9
FY2016E
1,162.5
-6.0
137.9
11.9
53.8
90.1
4.0
9.9
0.7
3.2
7.7
10.5
FY2017E
1,305.4
12.3
156.5
12.0
68.7
27.8
5.1
7.7
0.7
2.5
9.3
12.7
stock idea
Company background
Established in 1983, RAIL, an engineering company, is
primarily engaged in the manufacturing of high-pressure
aluminum die cast components and spheroidal graphite
(SG) iron castings for the automotive sector. It operates
from four locations to supply automotive components to
two-wheeler and four-wheeler makers including Hero
MotoCorp, the Honda group, Maruti Suzuki and the Tata
group. It has one of the largest high-pressure die casting
capacity in India and currently produces 45 million highpressure die cast components per annum. Around 75% of
its sales come from aluminium castings while the rest
come from ferrous. It also operates through joint ventures
and subsidiaries worldwide (exports contribute 20% of its
stand-alone revenues).
Chassis
Suspension &
Braking systems
19%
Engine
35%
Transmission
46%
Source: Company
Investment arguments
Divestment of joint venture stake; cash infusion to give
big relief: In 1996 RAIL had formed a joint venture with
FCC for the manufacture of clutch assemblies especially
for two-wheelers. In September 2014, RAIL divested its
entire 50% stake in the subsidiary in favour of its joint
venture partner for a consideration of Rs495 crore. The
significant cash inflow (vs a market capitalisation of Rs532
crore) from the deal would help RAIL retire all the debts
on its books and also fund capital expenditure (capex) plans
for the next few years. The management expects to receive
the cash by the end of Q3FY2015. We expect a significant
reduction in the interest burden of RAIL which will have a
positive impact on the bottom line of the company.
Domestic
80%
Source: Company
Entity
Stake
Products
Customers
FCC Rico*
Joint venture
50%
Clutch assembly
Joint venture
50%
Joint venture
92.5%
Rico USA
Subsidiary
100%
Rico UK
Subsidiary
100%
RASA Autocom
Subsidiary
100%
Sharekhan
October 2014
stock idea
Area
Commencement
Remarks
60
Sanand, Gujarat
Q4 FY2015
Aluminium casting,
machining for Tata Motors
Chennai, T. Nadu
Q4 FY2015
50
40
30
20
% of EBITDA
Source: Company
10
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
9
8
7
Lakhs
6
5
Q2FY15
Q4FY14
Q3FY14
Q4FY12
Sharekhan
FY17E
FY16E
FY15E
Q2FY14
FY14
FY13
FY12
FY11
-10
Q1FY14
100
30
Q4FY13
200
-5
Q3FY13
300
32
Q2FY13
400
34
Q1FY13
500
10
36
Q4FY12
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
600
15
38
Q4FY13
20
40
Q3FY13
Lakhs
25
42
Q2FY13
44
Q1FY13
FY17E
FY16E
FY15E
FY14
FY13
FY12
Rs cr
Q1FY15
80
70
60
50
40
30
20
10
FY11
Rs cr
October 2014
stock idea
Rs cr
25
160
20
120
15
80
10
40
0
FY10
FY11
FY12
FY13
FY14
% of standalone revenue
Source: Company
Return ratios
14
12
10
8
6
4
2
0
FY12
-2
-4
FY13
FY14
FY15E
RoE
FY16E
FY17E
RoCE
Source: Sharekhan Research
Key clients
Segment-wise
North America
Europe
India
Two-wheelers
Honda, Suzuki
Passenger cars
GM, Ford
GM
Commercial vehicles
Caterpillar,
Detroit diesel
Caterpillar,
Perkins
Caterpillar,
Tata
Caterpillar,
Perkins
System suppliers
Magna
Honeywell
Honeywell, Continental
Risks
RAIL is dependent on the auto sector and any slowdown in the sector will adversely affect its performance at the top
line and bottom line levels. The utilisation of the cash from the stake sale for purposes other than to deleverage the
balance sheet will be a key risk to our estimates.
Consolidated top line would be under pressure in the near term
The joint venture with FCC, ie FCC Rico, contributed about 30% of the consolidated top line of the company in FY2014
and hence with the divestment of the stake RAIL is likely to witness a drop in the revenues in this year and possibly in
the next year. However, the margin profile is likely to improve and a lower interest burden would boost the earnings,
Sharekhan
October 2014
stock idea
Rs cr
60.0
40.0
20.0
0.0
Revenues(LHS)
FY17E
FY16E
FY15E
FY14
FY13
(20.0)
FY11
80.0
1600
1500
1400
1300
1200
1100
1000
900
800
FY12
Rs cr
PAT (RHS)
Source: Sharekhan Research
Financials
Profit & Loss account
Rs cr
Particulars
FY13
FY14
FY15E
FY16E
FY17E
1,506
1,480
1,237
1,162
1,305
0.1
(1.7)
(16.4)
(6.0)
12.3
Operating profit
117
149
133
138
157
EBITDA
117
149
133
138
157
Net sales
Growth (%)
(11.3)
26.6
(10.2)
3.4
13.6
(87)
(94)
(85)
(85)
(90)
Other income
40
26
30
34
40
EBIT
70
80
78
87
106
(69)
(67)
(37)
(10)
(8)
13
40
77
98
Tax Provision
(8)
(10)
(12)
(23)
(29)
E/o Income/(Loss)
13
330
358
54
69
(8)
28
54
69
Growth (%)
n/a
n/a
947.6
90.1
27.8
(0.56)
0.20
2.09
3.98
5.08
n/a
n/a
947.6
90.1
27.8
Growth (%)
Depreciation
Interest paid
PBT (before E/o items)
Net profit
Particulars
Equity capital
FY14
FY15E
FY16E
FY17E
14
14
14
14
14
FY14 FY15E
FY16E FY17E
14
13
370
77
98
64
88
45
85
90
(10)
(13)
(12)
(23)
(29)
68
130
(68)
(21)
136
217
336
139
139
(148)
(66)
85
(100)
(78)
(148)
(66)
85
(100)
(78)
(12)
151
421
39
61
Debt raised/(repaid)
20
(150)
(245)
(32)
(30)
(3)
(6)
(2)
(24)
(24)
17
(152)
(246)
(55)
(54)
(0)
174
(16)
Key ratios
Rs cr
FY13
FY13
Capital expenditure
Particulars
Balance Sheet
Rs cr
FY13
FY14 FY15E
FY16E FY17E
7.8
10.0
10.8
11.9
12.0
(0.5)
0.2
2.3
4.6
5.3
0.4
0.3
3.8
3.8
3.8
1.4
1.0
(0.1)
(0.1)
(0.2)
331
335
670
700
745
Shareholders' funds
344
349
683
714
759
Total debt
499
349
105
73
43
Capital Employed
843
698
788
786
802
RoCE (%)
26
30
30
30
1.3
1.2
1.0
1.0
1.1
8.0
9.8
9.9
10.5
12.7
(2.2)
0.8
5.5
7.7
9.3
729
707
577
592
579
RoE (%)
11
11
185
169
176
0.7
0.6
0.4
0.4
0.3
EV/EBITDA (x)
8.7
5.9
3.4
3.2
2.5
144
18
64
64
85
(40)
(37)
(38)
(38)
(38)
PER (x)
n/a
196.9
18.8
9.9
7.7
802
Price/Book (x)
1.5
1.5
0.8
0.7
0.7
Total assets
Sharekhan
843
698
788
786
October 2014
stock idea
Annexure
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
Sharekhan
October 2014