Gabriel India: Good shock absorber - Buy

Many mid- and small-cap stocks have corrected sharply in the market volatility this year. Gabriel India is one among them. From ₹201 in the beginning of this year, the stock has lost about 35 per cent so far to touch ₹131 now.

Manufacturing ride-control products such as shock absorbers, struts, cartridges, dampers and front forks, the company supplies to almost all segments of the auto industry — be it bikes, three-wheelers, trucks or cars and utility vehicles (UVs).

With new vehicle sales still growing in double-digits, there is steam left for auto stocks. Hence, investors can make use of this opportunity to buy the shares of Gabriel India.

At the current price, the stock trades at a price-to-earnings ratio of 19 times its trailing 12-month earnings. This is cheaper than peers such as Wheels India (32 times) and Sundram Fasteners (26 times) and on par with the valuation of players such as Lumax Industries.

However, considering its small-cap nature (market capitalisation of ₹1,882 crore), it is advisable to buy in small quantities.

Sustained momentum

Gabriel caters to leading auto manufacturers such as Maruti Suzuki, Tata Motors, Toyota, Hyundai, M&M, Ashok Leyland, Honda, Bajaj, Piaggio, Royal Enfield, Yamaha and TVS.

While two- and three-wheelers bring in 55-60 per cent of the revenues, cars and commercial vehicles (CVs) chip in with 25-30 per cent and 10-15 per cent respectively.

The company has technical collaborations with global partners such as KYB - Japan for cars; KYBSE - Spain for cars and CVs; Yamaha Motors Hydraulic System Company for two- and three-wheelers, and KONI for luxury CVs and buses.

Vehicle sales have cooled off a little bit in recent times. So far this fiscal (April-October 2018), overall vehicle sales have continued to grow in double-digits, albeit at a lower 11.6 per cent.

Concerns over rise in fuel prices, higher insurance costs for vehicles due to mandatory, long-term third-party cover and a slowdown in vehicle loans from finance companies due to liquidity issues in the NBFC space dampened sentiments. However, these concerns are at best temporary. Crude oil prices have already cooled off from the peak of about $85 a barrel in early October to lower than $60 now.

Besides, given that the BS VI norms will kick-in from April 2020, making vehicles even costlier, pre-buying from next fiscal onwards is likely to give a leg up to new vehicle sales.

Gabriel is well-placed to cater to the demand.

Rural consumption has been growing faster than urban consumption in the last few months, thanks to the government’s focus on improving rural incomes and livelihoods through various measures. This bodes well for two-wheeler sales. In the recent past, Gabriel has won several orders for supply of components to new two-wheeler models from companies such as Yamaha, Suzuki and Royal Enfield. It has won an order to supply front forks to Honda Activa, which is among the top-selling scooters in the country.

The company has introduced new products like gas-charged shock absorbers for scooters as well as dual spring shock absorbers.

On the passenger vehicle side, sales of utility vehicles have grown at a faster pace than cars, indicating a maturing Indian market.

Gabriel India is a beneficiary of this trend, as it supplies components to models such as the Vitara Brezza, XUV, KUV and the Creta. Gabriel is also supplying to the upcoming new Alto and refreshes in the M&M stable as well.

Gabriel India has about 85 per cent market share in the supply of products such as shock absorbers and dampers to CVs.

Financials

For the half-year ended September 2018, net sales grew by 19 per cent Y-o-Y to ₹1,056 crore, while net profits grew by 18.4 per cent Y-o-Y to ₹55.6 crore. Operating margins were at 9.5 per cent, the same as the year-ago period. With after-market sales being more margin-accretive, the company is striving to improve its share of revenues from this space. This segment accounts for 11 per cent of revenues. The company has extended its product line in the after-market segment to tyres and tubes, wheel rim and spokes and ball joints.

Firms enjoy higher pricing power in after-market sales as they sell to retail clients. With auto makers, the bargaining power tends to be lower.

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