Stock Review: Setco Automotive

 

Setco Automotive represents an excellent opportunity for investors as it has a strong business model, growing cash flows, reasonable valuations and future investment plans.

   It is India's largest clutch maker for commercial vehicles with half its revenues coming from the replacement market. The company plans to expand exports and set up a manufacturing unit in Africa are likely to ensure sustained growth in future. Three out of four medium or heavy commercial vehicles manufactured in India use Setco clutches. Even in the domestic replacement market, Setco has a share of over 40%. Exports constitute around 7% of its revenues, which it plans to triple in the next four years.

GROWTH DRIVERS

The company is betting big on the African market for future growth. Apart from boosting exports, it plans to set up a plant there by March 2013 at a cost of 20 crore to cash in on growing local demand.

The auto industry is expected to face headwinds with rising interest rates, but Setco's large presence in the replacement market will ensure continued growth.

The scrip has gained 30% in the last six months against a 12% fall in BSE Sensex and a flat ET Auto Ancillary Index.

FINANCIALS

Over the past five years, the company's net sales have grown at 37%, while net profit has grown 46%, when compounded annually. During the same period, Setco has increased its operating profit margin from 14% to 20%. From a negative position in FY06, the company has steadily increased its operating cash flows to 27 crore in FY11.

During FY11, Setco Auto gave a 25% return on capital and a 32% return on equity. Its debt as on March 2011 was 94.7 crore, which is 1.1 times its equity. With an interest coverage ratio of seven, the company is in a comfortable position to service its debt

VALUATIONS

At 155, the stock trades at a trailing 12-month price to earnings ratio of seven. This is cheaper than Clutch Auto and Jamna Auto, which trade at P/Es between 10 and 13. Considering Setco's leadership position and future expansion plans, the stock looks attractive at current valuations.