Stock Review: Jamna Auto Industries Limited

 

India's auto market is on a roll, and that's good news for leaf and parabolic spring maker Jamna Auto Industries Limited. The product diversification should come as a force-multiplier in the long run

 

THE Haryana-based auto component maker Jamna Auto Industries Limited (JAL) will be a direct beneficiary of the growth in India's auto market. The company posted robust double-digit earnings growth in each of the past four quarters. The stock offers good opportunity for investors with a 2-3 year horizon.

BUSINESS:

JAL is the fifth-largest manufacturer of leaf and parabolic spring in the world with a capacity of 180,000 metric tonne per annum. It has pioneered the spring technology in India through a technical tie-up with the Japan-based NHK Springs. The company operates three plants located in Haryana, Madhya Pradesh, and Jamshedpur. Its major clients include Tata Motors, Ashok Leyland, Volvo, Eicher, General Motors, Toyota, Daimler, Suzuki, and Swaraj Mazda. The company's product mix comprises 92% from conventional springs and 8% from parabolic springs.

GROWTH:

JAL expects to increase the share of its revenue from parabolic springs to 20% by 2012 due to higher demand. To facilitate this growth, it has recently announced plans to set up manufacturing units for parabolic springs and airsuspension springs for commercial vehicles in Hosur and Chennai. Parabolic springs have higher longevity than conventional springs and offer much better margins. The company is also exploring opportunities in Japan and Europe to supply leaf springs in coming years.

FINANCIALS:

The company's consolidated net sales have grown at a compounded annual growth rate (CAGR) of 22% since FY07. For the nine months ended December, net sales grew by 51% to 569 crore while the net profit more than doubled to 26 crore on a year-on-year basis. Operating margin was at 12% compared with 10% a year ago. The company's return-on-equity of 24% over the past year is higher than its peers. It has not so far paid any dividend to shareholders since it has reinvested in its expansion plan.

VALUATIONS:

The company's stock price has fallen to around Rs 130 from its 52-week high of 180 in October 2010. At current levels, the scrip trades at 18 times its consolidated profit for the past 12 months. We expect the company to end FY13 with a consolidated net profit of 50 crore. Its forward P/E is seen at 10, which makes it an attractive investment.

RISKS:

The company derives 90% of its revenue from a single product. However, increasing focus on parabolic springs, besides introduction of new products such as air suspension, bogie suspension, and leaf axles, should help lower dependence on a single product.