Stock Fundamentals

Jamna Auto Industries: Buy

Parvatha Vardhini C | Updated on March 19, 2011 Published on March 19, 2011

Diverse clientele, market leadership position and planned value-additions to the product portfolio provide visibility to earnings.



Investors with a perspective of not less than three years can buy the shares of Jamna Auto Industries (JAI), a manufacturer of springs for the auto industry. The stock has corrected about 30 per cent from its 52-week high of Rs 174 in October 2010. At the current market price of Rs 131, it trades at a PE of about 14 times its trailing 12-month standalone earnings. The company's widespread clientele, market leadership position and planned value-additions to the product portfolio make for strong prospects.

Strong demand outlook

JAI is the largest manufacturer of leaf and parabolic springs in India and is among the top five producers of the world. Forming an important part of a vehicle's suspension system, springs perform the function of supporting the weight of a vehicle and spreading the load more widely over the chassis. The company mainly caters Tata Motors, Eicher Motors and Ashok Leyland. JAI's client additions include Navistar, Daimler,Nissan, AMW and Volvo.

With about 65 per cent market share, JAI has been a beneficiary of the uptick in CV (commercial vehicle) sales. For the nine months ended December 2010, net sales stood at Rs 569 crore, up 51 per cent year on year. Adjusted net profits grew from about Rs 8 crore last year to Rs 26 crore in April-December 2010. EBIDT margins came in at 12 per cent as against 7.5 per cent in the nine months of 2009. During this period, domestic MHCV volumes saw a robust growth of 43 per cent.

Going forward, the risk of a moderation in CV sales due higher interest rates remain. However, considering the fairly robust volumes, the holding up of freight rates and the fact there are no signs of any downturn in the CV cycle yet, there may still be steam left. The company too appears well-placed to cash in on the product line expansion plans of its major clients. For instance, demand will come from Leyland's plans to roll out about 25 models under the new U-truck platform, some of which have already hit the markets. Tata Motors too is sprucing up sales of its world truck range (Prima) vehicles.

In 2010, the company commenced production of the higher margin parabolic springs for CVs and made its initial supplies to Tata Motors. Parabolic springs weigh 25 per cent less than conventional leaf springs, offer twice its life and give better ride comfort. From about 8 per cent of total revenues, the contribution from these springs is expected to go up to 20 per cent by 2012. To meet the growing demand for parabolic springs from Daimler, Ashok Leyland and Nissan, JAI is setting up a dedicated facility at Hosur for the same.

Complete solutions provider

Apart from the diversification into parabolic springs, what holds promise for better realisations and higher margins over the medium-term is the company's move towards becoming an integrated manufacturer of suspension systems. It has signed a technical assistance agreement with the US-based Ridewell Corporation, to manufacture air suspensions and lift axles in India. A geenfield plant is being set up in Chennai for the same. These air suspension systems have applications in low-floor buses, which are increasingly being used in intra-and inter-city transport for better ride comfort. Lift-axles are used for load-bearing purposes in heavy vehicles.

De-risking revenues

Domestic OE (original equipment) sales bring in 90 per cent of the revenues currently. To de-risk from a slowdown, the company is concentrating on building the after-market demand by expanding its dealer network. Besides, JAI is tapping export opportunities in the OE segment in Japan and Europe. A specialised plant for OE exports is to be set up at Gwalior. Share of domestic OE in total revenues is expected to come down to 70 per cent in the next few years.



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