After long years of consolidation, growth has kick in for Talbros Automotive Components Ltd.
Talbros Automotive components Ltd (TACL) is a small cap auto ancillary company with the market cap of Rs.350cr. Company’s growth was subdued over the last few years (During FY13-FY16, the revenues were stagnated between Rs.350cr to Rs. Rs.390cr). Led by strategic initiatives and operating efficiencies, company has seen strong growth in the last quarter after long years of consolidation.
TACL, the flagship manufacturing Company of the Talbros Group was established in the year 1956 to manufacture Automotive and Industrial Gaskets in collaboration with Coopers Payen of UK. Today Company offers diversified product portfolio with Gaskets, Forgings, Suspension Systems, Anti-Vibration Products and hoses for its customers. Talbros is a market leader in the gasket segment and accounts for 38% of the total market share.
Talbros boasts of impressive and diverse clientele ranging from segments comprising of 2 wheelers, passenger vehicles, HCV/LCV and Agri & off loaders. It also has some of the landmark JVs with global giants like Nippon Leakless Corporation- Japan, Magneti Marelli- Italy and Marugo Rubber- Japan. Top 5 clients contributed 40% to the company’s topline. With India becoming a hub for global OEMs for sourcing and manufacturing, the company is in a sweet spot to leverage the global demand for its products and grow its market share.
Diversified customer base
Company’s business can be broadly categorized into three areas (Gaskets, Forgings, JV’s) in terms of revenue contribution. During H1FY18, Gasket business has contributed 57% to the top line, Forgings contributed to 19% and Remaining 24% has come from JV partnerships. With the revival in the automotive industry and addition of new clients the gaskets and forgings segments expected to show strong performance going forward. Along with strong growth, the turnaround in JV’s should help boost the profitability of the company.
Gasket business to grow at double digit rates:
With a market share of 38% in the gaskets segment, Talbros is the market leader in the two-wheeler, agri & off loaders and CV segment. It is thrice the size of the nearest competitor, Banco Gaskets (India) Ltd. The company continues to enjoy its strong hold over the two wheeler industry with an enviable market share of 92% (served by both standalone and JV).
The segment is set to be driven by strong OEM sales (60-65% of the gasket segment) on new orders from Ashok Leyland, Tata Cummins and Volvo in the CV gasket segment. The company is also in talks with General Electric, Maruti Suzuki and Honda with a focus to further diversify its client base. Exports which account for 13-15% of the total segmental revenue, is set to improve to 20-25% as the company has been able to attract new OEMs which includes two wheeler giants- Ducati and farm equipment manufacturers Kubota Japan & Kubota Thailand. Gasket sales are expected to grow at a CAGR of 11% to Rs 355 crore by FY20 from Rs 258 crore in FY17.
During the year gone by, in technical relationship with Sanwa Packaging Ltd – Japan, company has introduced two new products i.e. Heat Shield which is within the gasket product line and manufacture of gaskets using post coatings technology which will start in October this year. Its main clients for heat shield are Volvo Mexico, Daimler India and Volvo. The government preponing the implementation of BS VI to April 2018 for the NCR region augurs well for the demand of the heat shield portfolio.
Export business to drive the Forgings segment:
Exports account for 60-65% of the forgings revenues. After capturing the agri market, company’s forging division has forayed into global OEM car segment and is in talks with a large two wheeler manufacturer for its forging requirements. With a view to diversify its geographic risks, company has approached new customers. During the last year company has got new orders from Volvo Eicher and Amul Industries in domestic market and from Jaguar, BMW Germany and GKN Europe.
The revenues from Forging division stood at Rs. 71 crores in FY17 against revenues of Rs. 62 crores FY16. Forgings revenues are expected to grow at a CAGR of 24% to Rs 132 crore by FY20 from Rs 71 crore clocked in FY17 led by strong growth in exports business.
Turn around in JV’s to boost consolidated profits:
The JV Company Nippon Leakless Talbros Private Limited (LTL) has been exploring various options to increase its presence in two wheeler gasket business. LTL has been constantly developing gaskets for new models to be launched by Hero, Honda & Yamaha in the coming financial year. LTL is in constant touch with Toyota to develop gaskets for its four wheeler and it is expected that mass production will be started in the month of September 2017.
The second JV Company Magneti Marelli Talbros Chassis Systems Pvt Ltd (MMT) is trying to enter higher value- added products such as the front axle and is in talks with Maruti Suzuki India Limited on the same and also on of expanding its range of products with them. MMT is enjoying the bull run with Maruti because they are supplying to their fast-moving models such as Baleno, Brezza which are doing very well and has also secured a large order from Jaguar Land Rover.
Talbros Marugo Rubber Private Limited (TMR), the third JV Company is also on the right track. They are increasing their customer profile and looking very aggressively on exports as well. TMR has also received new business from Honda and Daimler for hanger and anti-vibration parts.
Strong Financial performance:
In Q2FY18, Talbros reported a robust growth of 26% in the top line from Rs 80 crore in Q2FY17 to Rs 100.8 crore in Q2FY18. The EBITDA of the company increased from Rs 9.2 crore to Rs 10.7 crore in Q2FY18. Inspite of this, EBITDA margin fell by 80 bps from 11.3% in Q2FY17 to 10.5% in Q2FY18. Recent quarter saw an uptick in the contribution of the joint ventures in the overall profitability of the company. The share of profits added to the consolidated statement of profit rose from Rs 1.3 crore in Q2FY17 to Rs 2.2 crore in Q2FY18. On an annual basis, this share rose from Rs 2 crore in FY16 to Rs 6.9 crore in FY17. The profit after tax of the company increased from Rs 3.02 crore in Q2FY17 to Rs 6.94 crore in Q2FY18.
The overall revenues of the company had remained sluggish for the period FY13-16 and saw a revival in the year FY17 (on account of increasing contributions by the joint ventures and foray into the overseas market). Company is targeting to grow its revenues at 19% CAGR over the next three year to reach Rs.725cr turnover by FY20. Further the EBITDA and PAT margins are expected to expand from 12.4% and 5% in FY17 to 13.3% and 7% respectively by FY20. The stock is currently trading at 10x its FY19E earnings. Investors with medium term horizon can buy the stock at current levels around 280 and add on dips with price target of Rs. 450 with implies potential upside of 60%.