Not a 'buy' recommendation
*Talbros Automotive Ltd. | CMP Rs 143 (Mcap Rs 1.8bn)*
*Talbros – Small wonder*
We interacted with the management of Talbros Automotive Ltd to assess the current demand situation. Key segments include 2/3Ws (~36%), PVs (~28%), CVs (~18%) and Tractors (~11%). whereas its products encompass Gaskets (~49%), Forgings (~31%), Chassis components (~15%), Anti-vibration products & hoses (~5.7%). The company is a leader in automotive gaskets with ~48% market share whereas the balance is imported from other countries. Further, it supplies forging components (axles, transmission parts, exteriors) to OEMs like Maruti, JLR & Tata Motors. Backed by its own R&D team, it has indigenously developed heat shields (noise vibrators) where it is seeing good demand from JLR, Daimler, Tata and is in active discussions with OEMs like Hyundai and Kia for new orders.
*Facilities:* Gaskets – (Faridabad, Pune, Sitarganj), Forging (Bawal), Nippon Leakless Talbros Pvt Ltd. (Bawal, Haridwar), Magnetti Marelli (Faridabad, Manesar, Pune), Talbros Marugo Rubber (Manesar).
*Key customers (revenue includes JVs):* Talbros caters to a diversified customer base which include marquee OEMs such as Hero (~11%), Bajaj (~9%), BMW (~5%), Maruti Suzuki (~7%), JLR (~5%), GKN (~4%), Tata Cummins (~7%), Dana Italia (~3%), Tata Motors (~3%), HMSI (~3%).
*Demand outlook:* The company is seeing increasing orders from 2W OEMs including Bajaj (due to robust recovery in export markets) and Hero (recovery in entry level MC & foray into premium MC) for Gaskets and forging components, whereas volumes from HMSI is rather muted owing to slow demand for scooters. In PVs, it indicated that demand is seeing sustenance even beyond festive sales. The demand from farm segment is seeing fastest improvement. It is further witnessing increasing traction from Cummins where it has supplies ~9k units/month vs ~7k units on YoY basis). The content per vehicle for CVs is set to increase by 1.6x for VECV and 2.5x for Cummins and should see decent growth from Q4 onwards.
*Capacity utilization* for gaskets stands at ~85% (or Rs ~280mn/month), Forgings at ~75-80% (Rs ~180mn/month) while the utilisation at other JVs stands at ~75-80%.
*Exports (~22%)* are seeing strong recovery majorly due to new orders from BMW, JLR and Dana Europe. The company expects exports to ramp up to ~30% of its sales by FY25e.
*Outlook & Valuation:* Apart from legacy business of supplying gaskets, the company has forayed into newer product categories like sheet metals, forgings, heat shields, chassis systems, hoses and anti-vibration products. Talbros has grown its revenue/EBITDA has grown at 4%/1% over FY17-20. We believe, the company could outpace the industry growth at 1.5x on back of new product introductions, ramp up of key export markets and focus on new products like heat shields. *At CMP of Rs 143, the stock trades at 0.5x TTM sales*. With minimal capex of Rs 100-150mn, the company is well placed to generate superior free cash flows and improving return ratios over the medium term. The valuations should see support from robust traction in JVs with industry leading players like Magnetti Marelli (Forgings), Marugo Rubber etc.