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Although the economy has slowed in 2011-12, commercial vehicle (CV) sales have been encouraging. Cumulatively, medium and heavy commercial vehicles sales have grown by 12 per cent year-on-year for the first ten months. With lead economic indicators pointing to a bounce-back in growth and interest rate hikes coming to an end, the CV industry will witness higher volume growth as the calendar year progresses. These trends favour Jamna Auto Industries (JAI), which has 65 per cent market share in the supply of leaf and parabolic springs for CVs.
Forming an important part of a vehicle's suspension system, springs support the weight of the vehicle and spread the load more widely over the chassis. Attractive valuations at eight times its trailing twelve-month earnings and planned value-additions such as lift axles and air suspension systems make for strong prospects. Investors with a perspective of one to two years can buy the stock.
A diversified clientele including Tata Motors, Ashok Leyland, Eicher and Volvo puts the company in a sweet spot. Incremental demand will come from the expansion plans of its clients. Ashok Leyland is rolling out several models under the new U-truck platform. Tata Motors is sprucing up sales of its world truck range (Prima) vehicles.
Value additions
What bodes well for JAI's margins and realisations is the focus on parabolic springs and the setting up of manufacturing capacities for lift axles and air suspension systems. Parabolic springs are lighter than leaf springs, improve fuel efficiency, offer twice its life and give better ride comfort. While these springs are widely used for light CVs, companies such as Tata Motors are beginning to use them for some heavy vehicle models too. These springs bring in 12-13 per cent of the company's revenues now.
The shifting market preference towards higher-tonnage vehicles augurs well for lift-axles, which are used for load-bearing purposes in heavy vehicles. Air suspension systems have applications in low-floor buses. To de-risk from the swings in new CV sales, JAI is expanding its dealer footprint. This will cater to the replacement demand for springs. It is working on improving the replacement market share in total revenues to 30 per cent from the current 10 per cent.
For the nine months ended December 2011, net sales grew 17 per cent year on year to Rs 665 crore. Adjusted net profits moved up over 50 per cent to Rs 31 crore. Cost pressures restricted operating profit margins to 11 per cent, down from 13 per cent last year.
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