Jamna Auto: In the fast lane

Tailwinds for truck and bus sales, and better product mix, are key drivers

While many mid- and small-cap stocks have seen valuations catapult, Jamna Auto Industries, a supplier of springs and other suspension products for commercial vehicles, is among the few that are reasonably valued. It now trades at 22 times its trailing 12-month earnings, cheaper than other auto component peers such as Sundram Fasteners, Wheels India and Lumax Industries.

Tailwinds for truck and bus sales, coupled with improved product mix, have put the company in a sweet spot. The stock touched its one-year high of ₹103.2 in early May 2018, but broader market volatility has seen it correct about 20 per cent from this level, making it a good entry point. Investors with a perspective of one to two years can buy the stock.

Key positives

Jamna Auto manufactures conventional leaf springs, parabolic springs, lift axles and air suspension products predominantly for commercial vehicles.

The company has a technological collaboration with Ridewell Corporation, US and Tinsley Bridge, UK and is the second largest player in leaf springs globally, with a capacity of 2.4 lakh tonnes per annum.

It is the market leader in India, with a share of about 70 per cent and counts Tata Motors, Ashok Leyland, Bharat Benz, Volvo, Volvo-Eicher, AMW and Izuzu, among its clients.

After derailing due to demonetisation, BS-IV and GST transition, commercial vehicle sales are back in the fast lane.

For the year ended March 2018, sales volumes of medium, heavy, and light vehicles grew at 20 per cent.

The run rate has improved this year, with commercial vehicles showing a strong 45 per cent growth in sales volumes in the first few months of this fiscal.

Although private sector capital spends so far remain somewhat subdued, government investments on housing, road building and allied infrastructure activities have had a spill-over effect on truck sales in this period.

These factors, along with the record output in agriculture production expected this year, are expected to keep demand for freight carriage ticking.

The new axle norms, permitting higher loads for new and existing vehicles, are not expected to dampen demand for new vehicles sharply.

To economise on running costs, especially when fuel prices inch up, overloading in the haulage and tipper segment is already rampant in several pockets in the country.

Besides, given that permissible load limits in other countries have been higher than ours, trailer trucks used to carrying export-import containers have been carrying more than permissible loads already. Hence, the impact of the new axle norms will be limited.

Over the medium term, the implementation of the scrappage scheme for old vehicles will also aid new vehicle sales. A scrappage scheme for commercial vehicles that are over 20 years old is in the works.

Value additions

An interesting trend visible in heavy truck sales is the shift in customer preference to higher tonnage trucks — those exceeding 25 tonnes.

From about 40-43 per cent in 2015-16 and 2016-17, the share of higher tonnage trucks in the total heavy truck sales has moved up sharply to over 50 per cent in 2017-18.

Expanding highway infrastructure, improved operating efficiency from the removal of check posts under GST, and better fuel efficiency of the higher tonnage multi-axle trucks under BS IV emission norms, is triggering demand for these trucks. These apart, unlike the pre-GST period where location of warehouses was based on taxes charged by States, companies can now afford to locate them based on their convenience.

This trend bodes well for parabolic springs, which are used more in heavy trucks and off-road vehicles.

They are ideal for vehicles carrying heavy loads, being lighter and more flexible, ensuring better ride quality than conventional leaf springs.

Currently, only one-fourth of the springs sold by Jamna Auto are parabolic; this ratio is expected to go up as heavy trucks become more popular.

Parabolic springs also yield higher margins than the conventional ones.

The company is also working on widening its product portfolio. New products in the pipeline include stabiliser bar, u bolt, z springs and trailer suspension.

A larger product portfolio will help increase content supplied per vehicle and improve their pricing power with auto manufacturers.

While after-market sales bring in about 10-15 per cent of the revenues currently, the company is increasing its touch points to improve its presence in this high-margin-yielding segment.

Financials

Thanks partly to the low base of the June 2017 quarter due to the BS-IV and GST transition, the company posted strong numbers in the April-June 2018 period.

Net sales grew by 132 per cent to ₹548.7 crore, while net profits more than doubled to ₹41 crore from about ₹18 crore in the April-June 2017 quarter.

Operating margins improved marginally to 11.3 per cent in the latest quarter, compared with 11. 1 per cent a year ago.

The company’s debt-to-equity ratio has been improving gradually over the last few years and stands at 0.15 for the year ended March 2018.

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