Jamna Auto Industries (JAI) is engaged in the manufacturing of suspension
products for commercial vehicles viz leaf springs and lift axles. It is the market
leader in the MHCV OEM springs commanding market share of about 60%, while
it has a 15% share in the aftermarket springs segment.
Recovery in OEM segment coupled with aftermarket focus to drive growth
The MHCV industry is clearly in an upcycle and is poised to grow at 16% CAGR
over the FY2015-2018 period. This would be on account of economic pick-up
leading to uptick in freight, huge pent up demand due to low base (industry had
halved over FY2013-2014 period), and improving profitability of the fleet
operators on account of firm freight rates and decline in diesel prices. The
industry is likely to reach pre-slowdown levels by FY2018. Apart from growth in
the springs segment, JAI is witnessing robust demand for lift axles used in multi
axle vehicles (JAI commenced supplies to market leader Ashok Leyland). JAI is
also in negotiation with high-end bus manufacturers for supplies of air suspension
systems. We expect the share of new products to inch up from 4% of revenues in
FY2015 to 7% by FY2018. We expect JAI to clock 14% revenue CAGR over the
next three years.
Operating leverage, raw material localization and new products to
augment margins
JAI would reap benefits of operating leverage on account of healthy double-digit
top-line growth. Steep reduction in crude prices due to slowdown would lower the
power and fuel costs which account for 7% of the top-line. Further, increasing
share of high margin products such as parabolic leaf springs and lift axles (new
products’ share would go up from 22% currently to about 30% by FY2018) would
also augment margins for the company. We estimate JAI’s operating margins to
improve by 130bp over the next three years.
Outlook and valuation: JAI’s top-line is estimated to grow at 14% CAGR on
account of uptick in the MHCV OEM segment and ramp up of new products, ie
parabolic leaf springs and lift axles. Further, operating leverage coupled with a
better product mix and savings on energy costs would enhance margins. We
expect JAI’s earnings to grow at a CAGR of 35% over FY2015-2018. JAI’s return
ratios are also estimated to improve on account of margin expansion, better working
capital management and lower gearing. We initiate coverage on JAI with an
Accumulate rating and target price of Rs258 (based on 15x FY2018E earnings).

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