Wheels India: Book Profits

Investors can make use of the run-up in the Wheels India stock to book profits. From our earlier ‘buy’ recommendation at Rs 314 in November 2011, the stock has more than doubled, moving up by about 150 per cent.

At the current market price of Rs 784, the stock trades at a rich price-to-earnings ratio of about 21 times its trailing 12-month earnings. This is close to its three-year high of 25 times.

Bleak outlook

Wheels India, a TVS group company, is a supplier of steel wheels for passenger vehicles, trucks, buses, tractors and construction equipment. The company caters to two-thirds of the domestic market requirements and derives about 80 per cent of its revenues from the same.

For the quarter ended June 2012, net sales inched up by about 11 per cent to Rs 472 crore while net profits grew by 25 per cent to Rs 8.9 crore.

Profit growth was helped partly by a softening of raw material costs and higher other income.

Operating margins came in at 7.7 per cent, slightly higher than the 7.5 per cent in the same quarter of last year.

Sustaining this growth over the next one or two quarters will be a challenge. For one, from just a slowdown in volume growth last year, medium and heavy commercial vehicle volumes have actually shrunk in the April-July 2012 period, compared with the same period last year.

As against a year-on-year growth of 7.9 per cent in 2011-12, the volumes in the first four months of this year have shrunk by 12.75 per cent. Lower cargo offerings from agriculture, manufacturing sector and export-import trade have resulted in truck rentals dropping during this period as well.

The absence of interest rate cuts, slow industrial output growth and question marks on agricultural growth due to poor monsoon imply that this trend will continue.

Two, although passenger vehicle sales are looking up currently, the company may not be able to take full advantage of this trend.

This is because of the plant closure at Maruti Suzuki, one of its important clients. Maruti’s Manesar plant, which produces the in-demand Swift and Swift Dzire vehicles has been closed for about three weeks now due to labour dispute.

Three, tractor sales , that was holding up till mid 2011-12, also slackened in the second half, pulling down the over all growth for the year to 12 per cent.

The first few months of 2012-13 have been no better. A high base resulting from the 20-30 per cent growth witnessed in 2009-10 and 2010-11, high interest rates and weak monsoon may further curtail growth.

Benefits priced in

What could partly set off the subdued outlook on the domestic front are exports.

Catering mainly to the mining and construction equipment industry abroad, Wheels India derives about 15 per cent of revenues from exports.

With 34 clients globally and supplying to markets such as Japan, Korea, North America, Europe, Brazil, China and Indonesia, the company has been a beneficiary of the strong demand for large mining trucks witnessed in these export markets so far.

Besides, it has diversified into making air suspension systems for buses, trucks and trailers.

Unlike wheels, air suspension systems have a higher service and replacement market. The company also makes steel structural components for power plants.

However, at a valuation of 21 times, the prospects on these fronts seem to be priced in.

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