Initiating Coverage on SML Isuzu - Sushil Finance

Strategically Increasing Presence in Niche Category of MCV

SIL was primarily present in the cargo segment with a blend of 63:37 (FY07) between its cargo (GC) and passenger carriers (PC). Given the volatility in the GC segment and its huge dependence on the economic activities, the company strategically moved towards high margin and less volatile PC in order to improve its margins and thereby protect itself from the downturn in the CV industry. In FY12, the company lost market share due to some supply constraints with regards to chassis frame & bus body availability, which is no more a concern, thus, starting FY13, the company's bus sales (7.5-12 tons) recorded an increase of 43% YTD vs. industry's 23% (+248 bps market share). With challenging macro environment, going forward we expect the share of PC to increase from 48% in FY12 to 54% by FY14E. Overall, we expect the MCV contribution to total sales to increase from 63% in FY12 to 68% by FY14E driven by product up-gradations & innovations.

Capacity Expansion at Minimal Incremental Capex - 'Can Result in Huge Operating Leverage'

SIL incurred a capex of Rs.1,000 mn over FY08-10 to double its capacity from 12,000 to 24,000 units in a phased manner. However, due to unfavorable macroeconomic conditions, company stalled its expansion plans at an increased capacity of 18,000. Since the major capex is already in place, the company does not have to incur significant amount (majorly towards process up-gradation and some equipment purchase) to further expand its capacity from 18,000 to 24,000 and gradually to 30,000 with 1 more shift. Also, as the current capacity is underutilized (78%) and given supply side constraints getting resolved, we expect the company's sales to increase by 2.9% & 8.1% YoY in FY13E and FY14E resulting in better operating efficiencies and margin improvement.

ISUZU Brand - 'Yet to Explore'

Recently, Isuzu Motors, Japan has increased its stake in SIL from 4% to 15% which shows Isuzu's confidence in the company and the country's CV market. Currently, Isuzu branded products account for only 1% of total sales, so SML is yet to see true color of ISUZU platform, which will result in increased share of Isuzu's products in total sales. Infact, SIL is likely to launch a new bus (IS12B) and truck on the Isuzu platform over the next 2 years.

Strong Financials, Healthy Return Ratios & Consistently High Dividend Payout

SIL's Revenues & APAT grew at a CAGR of 11.4% & 21.1% over FY07-12 driven by better product mix. SIL generates healthy cash flows sufficient to take care of future capex and retire debt. The current D/E stands at 0.4 (Working Capital Loan) which is expected to go down further due to effective working capital management. SIL has healthy return ratios with RoE & RoCE of 18.4% & 21.7%. The company also follows a consistent dividend policy with an average payout of ~28%.

OUTLOOK & VALUATION

In the current uncertain macroeconomic conditions, SIL is the best bet in the CV industry given its low base, underutilization of capacity, favorable product mix and low gearing. We believe the company is well placed to reap the benefits of economic revival with its margins only set to improve from current levels due to favorable product mix and potential benefit of huge operating leverage. Introduction of new Isuzu branded products would add to the existing premium offerings of the company. At the CMP of Rs.387, the stock is trading at 11.4x and 9.8x its FY13E & FY14E EPS of Rs.34.0 & Rs.39.3 respectively. We maintain our BUY recommendation on the stock with a price target of Rs.472 (based on 12x FY14E EPS).

Source : Equity Bulls

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