Stock Fundamentals

Jamna Auto Industries: Spring in its step - Buy

Parvatha Vardhini C | Updated on January 24, 2018 Published on July 31, 2016

This component maker will benefit from the good run in the auto sector



Despite the rally in the last two years, some auto component stocks continue to trade at reasonable valuations, thanks to good earnings growth from the cyclical upturn in auto sales. Jamna Auto Industries (JAI) is one of them.

The company is a major supplier of springs and other suspension products to commercial vehicles (CVs). With more steam left in the medium and heavy CV (MHCV) segment , the company is well-placed to record a few more quarters of strong earnings growth. Investors with a one to two year perspective can take exposure to the stock. It currently trades at a reasonable 20 times its trailing 12 month earnings.

This is cheaper than other CV suppliers such as ZF Steering Gear (33 times), Automotive Axles (28 times) and Wabco India (56 times). It is better to limit holdings though, considering that the stock is a small-cap bet (market capitalisation of about ₹1,300 crore).

Benefits from CV up-cycle

MHCV sales have picked up well in the last two fiscals. The segment has kept up its double-digit growth in the first three months of this year as well.

The reform measures taken in sectors such as mining, big investments being made by the government in road infrastructure and the fact that borrowing rates are getting cheaper, bode well for CV sales in the months to come.

Besides, higher industrial growth and higher agricultural output from the good monsoon are expected to keep demand for freight transport strong and, hence, the demand for CVs healthy. With LCV sales reversing its downtrend too, truck sales should continue to fire on all cylinders in the months to come. Moves such as the recent directive to de-register diesel vehicles in the Delhi-NCR region augur well for new CV sales too.

JAI will be a beneficiary as it has a 66 per cent market share in supplies to domestic auto manufacturers and caters to almost all the CV makers such as Tata Motors, Ashok Leyland, Bharat Benz, Izuzu, Volvo and Mahindra and Mahindra.

Value additions

From being a supplier of a range of leaf springs traditionally, the company has expanded its product portfolio to include parabolic springs, lift axles and air suspension systems. Springs are part of a vehicle’s suspension system and are used to support the weight of the vehicle and spread the load over the chassis.

With many LCVs using parabolic springs, the company will benefit from a pick up in LCV sales in recent months. The shift in market preference towards higher-tonnage trucks augurs well for lift-axles, which are used for load-bearing purposes in heavy vehicles.

Air suspension systems have applications in low-floor buses and trucks too. JAI is currently supplying lift axles to Ashok Leyland and supplies air suspensions to SML Izuzu. The company aims to increase its revenue mix from these new products to 33 per cent over the next few years.

This gives scope for margin expansion as their value-added nature endows the company with higher pricing power. Margins will also be helped by higher sales in the replacement markets. JAI is concentrating on improving its presence in the aftermarket segment, which currently brings about 15-20 per cent of the total revenue.

Financials

For the year ended March 2016, the company’s net sales moved up by 12 per cent to ₹1,073 crore over the same period last year while net profit moved up to ₹72.3 crore from ₹29.4 crore a year ago. Operating margins came in at 12.5 per cent versus 8.6 per cent last year.

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