Amongst largest camshaft player with long term client relationship
PCL is one of the world’s leading manufacturers and suppliers of passenger
vehicle camshafts producing about 150 different varities. Over the last five years,
PCL has almost doubled its market share and currently commands about 8-9% of
the global passenger vehicle camshaft market. PCL has developed long term
relationship of over 10 years with global OEM’s and, is the preferred supplier with
General Motors, Ford Motors, Hyundai, Maruti Suzuki and Tata Motors.
Increased outsourcing of machining by OEM’s coupled with new plant to trigger
growth: There is a growing trend of outsourcing camshaft machining amongst the
global OEM’s. As per the industry estimates, currently ~35% of camshafts are
machined in house by the OEM’s. Given the high capex involved in setting up the
machining facilities (machining typically has asset turnover of 1x), OEM’s are
increasingly outsourcing the machining operations. Further, the proposed new
ductile iron camshaft machining plant would broaden the product profile for PCL.
Investment concern:
Currency risks and client concentration: PCL derives about 80% of revenues from
exports with Euro and GBP constituting major revenue currencies thus exposing it
to risk of adverse currency movement. Further, General Motors and Ford form about
35% of the revenues each leading to client concentration.
Outlook and Valuation: PCL return ratios are likely to be impacted over the next
two years on account of raising of capital and low capacity utilisation of the plant
initially. Further PCL is exposed to currency risks and higher client concentration.
On the price to earnings per share (EPS; post-IPO) front, the company is valued at
25.8x 1HFY2016 annualized numbers, while a larger and more diversified player
in a similar business, Bharat Forge is trading at a similar multiple of 25.1x
FY2016 estimated numbers despite better ROE. Also, another player in forgings
business like Ramkrishna Forgings with a better ROE is trading at steep discount
to PCL. Further, PCL is trading at a higher EV/Sales multiple of 3.6x as compared
to 2.7x and 2.2x of Bharat Forge and Ramkrishna Forgings respectively despite
competitors having diverse product profile and far bigger size as compared to
PCL. Hence we recommend Neutral on the issue given the expensive valuations.
