Magic Compounder: PPAP Automotive

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Magic Compounder: PPAP Automotive

November 02,2017 admin 0 Comment

Points to note over here and Possible Scenarios:

About PPAP Auto:

  • Leading manufacturers of automotive sealing systems (55% of revenue, 20-22% margins) and injection moulding products (~45% of revenue, 11-13% margins)
  • Technical tie up with Tokai Kogyo (Japan) for its sealing systems & with Nissen Chemitec Corp (Japan) for injection moulding division
  • JV with Tokai Kogyo Co, Japan for manufacturing rubber based sealing systems (products like opening trims, hood seals, door weather strip, etc).
  • Clients: Maruti (~46% of revenue), Honda Cars India Limited (~31% of revenue), Nissan (9% of revenue), Toyota (6% of revenues), Tata (2% of revenues), Others (6%)
  • 5 manufacturing plants (3 in Noida, 1 in Rajasthan, 1 in Chennai)
  • The company claims 70% MS in India & 90% MS for all the customers they supply to.
  • The current consolidated capacity utilization (sealing + injection) is at 70%.The capacity utilization of sealing business is around 65-67%. The capacity utilization of JV is less than 40%. The company does not foresee any additional capex requirements in FY18-19 except for maintenance + ongoing capex (30-35 Cr)
  • All the capex requirements and loan repayments would be met through internal accruals.

The Change:

  • Hyundai wants to localize parts for their models to remain competitive. Currently these parts are supplied by their Korean vendors who export these parts to India.
  • PPAP have got business for two models as of now, namely Eon and Creta. For Eon, commitment of products for entire production.
  • Management is hopeful about getting into business with other models of Hyundai too.
  • Hyundai is second largest seller of passenger carsin India and with acquisition of Kia and its entry into India, they are looking to sell 1 million cars per year.
  • Hyundai becomes an important customer to enable/accelerate growth story of the company.

 

The Positives:

  1. Market leader in auto motive sealing systems
  2. Key customer Maruti growing well, expanding customer base
  3. PPAP supplies 90%+ sealing requirements of MS. Honda sales were stagnant till FY16 but post the launch of new model of Honda City, Honda is also doing better. High double digit growth from these two clients could lead to good growth in topline for PPAP.
  4. Capex completed, utilization to ramp up
  5. Healthy financials: Working capital cycle of ~40 days, D/E: 0.25x, Improving return ratios (ROE increased from ~3% in FY14 to ~11% in FY17, ROCE increased from ~5% in FY14 to ~15% in FY17; With the capex over with and ramp up of capacity utilization and improving WC cycle could lead to improvement in return ratios going forward (but this could be limited to due to lower asset turnover of ~1.2x. OCF/EBITDA : more than 85%
  6. The biggest trigger remains the progress on Hyundai + Kia deals. Hyundai + Kia is second biggest car seller in India with 1 million cars a year. A design win in one of the best selling models (like i10 or i20) might give fast revenue growth

Views and Valuations:

PPAP is the undisputed leader in its category and trade at a modest 19 TTM PE at current levels. In the past company has shown significant progress in bettering margins however topline was always depended on growth of Maruti and Honda and PPAP topline mirrored their blended growth. Now with Hyundai coming in a whole new chapter opens up for PPAP and I expect growth to accelerate in toplines to the tune of 20-25%. With operating leverage at play margins too may increase from this level. With topline growth, margin expansion and debt reduction conservatively PPAP PAT may grow at 40-45%. Market was probably bit skeptical paying them high valuations due o their dependence on Honda and Maruti and now with Hyundai coming in that fear should ease out.

We expect PPAP to command 25 PE in FY 19. With that along with 40% profit growth we arrive at a marketcap of 915 crs which is a 75% upside from current levels.

PS: The stock was shared as a free stock idea with paid subscribers at the price of Rs. 380.

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