pcl report

Precision Camshafts Ltd. BUY

- 1 - Monday, 25th

January, 2016

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.

ST

OC

K P

OIN

TE

R

Target Price `241 Issue Price `180-186 FY17E PE21.7

Index Details Precision Camshafts Ltd. (PCL) is one of the world’s leading

manufacturers and supplier of camshafts, a critical engine component,

in the passenger vehicle. It manufactures over 150 varieties of

camshafts for various segments. With a market share of 8%-9% in 2014,

PCL aims to increase the same to 13-15% by FY20. Long term

relationships with marquee global OEMs gives PCL an edge over the

new entrants in the camshaft industry. We are positive on the company

given that:

Over FY12 to FY15, revenues of PCL have grown at a CAGR of 21%

to Rs 532 crore in FY15. The growth is expected to continue at a

CAGR of 13% to Rs 861 crore by FY19E. We expect PCL’s EBITDA

margin to expand to 28.7% by FY19 due to increasing focus on

value added products viz machined camshafts. We expect PAT

margin to expand by 210 bps to 13.8% over FY15- 19.

From the IPO proceeds, PCL intends to utilize approximately Rs 200

crore for greenfield expansion -- setting up new machine shop with

capacity of 9.6 Lacs tons specifically for ductile iron camshafts and

assembled camshafts over FY17-FY18. It also aims to foray into the

manufacturing and supply of sliding cams and cam modules in

accordance with its expansion strategy.

PCL has entered into two joint ventures with NSPCL. PCL has also

entered into a 5 year exclusive agreement with EMAG for transfer of

certain know-how and technology in order to strengthen its foray

into assembled camshafts and expand PCL’s business operations

in the European market. As a part of growth strategy, PCL seeks to

acquire or make strategic investments in a company/business

particularly in Europe.

With expansion plans in place, the growth trajectory in volumes (4 Yr

CAGR of 15% to 15.18 mn camshafts by FY19) should continue. We

initiate coverage on Precision Camshafts Ltd as a BUY with a price

objective of Rs 241 representing a potential upside of 30% from the

Issue price of Rs 180-186 over a period of 14 months. We have used the

EV/EBITDA multiple approach to value PCL & assigned a multiple of 13x

on FY17 EBITDA of Rs 172.7 crore to arrive at the target price.

Sensex 24,486

Nifty 7,436

Industry Auto

Ancillary

Scrip Details

MktCap (` cr) 1,762.2

BVPS (`) 104.2

O/s Shares (Cr) 9.5

FVPS (`) 10.0

Shareholding Pattern

Shareholders %

Promoters 64.0

DIIs 0.0

FIIs 0.0

Public 36.0

Total 100.0

Key Financials (` in Cr)

Y/E Mar Net

Sales EBITDA PAT

EPS

(`)

EPS

Growth (%)

RONW

(%)

ROCE

(%)

P/E

(x)

EV/EBITDA

(x)

2014 467.4 112.5 13.1 7.7 164.2 15.3 27.2 24.1 28.1 2015 532.4 140.8 62.4 6.6 -14.8 13.2 25.5 28.3 14.6 2016E 506.7 139.4 63.4 6.7 1.6 12.4 14.5 27.8 16.1 2017E 616.8 172.7 81.2 8.6 28.1 12.4 17.2 21.7 11.7

- 2 - Monday, 25th

January, 2016


Company Background

PCL is one of the world’s leading manufacturers and supplier of camshafts, a critical

engine component, in the passenger vehicle segment based on its estimated global

market share by volume. PCL manufactures over 150 varieties of camshafts for

passenger vehicles, tractors, light commercial vehicles and locomotive engine

applications the company at its manufacturing facilities in Solapur, Maharashtra.

Despite a relatively slower period of growth in the automobile industry in the last five

years, PCL has been able to consistently increase its global market share in

passenger vehicle camshafts market from 5%-6% in 2010 to an estimated 8%-9%

in 2014 due to increased product basket. PCL aims the same to increase further to

13-15% by FY20.

Leveraging the experience, expertise and existing relationship with customers, PCL

seek to capitalize on the anticipated global demand for camshafts in the passenger

vehicle segment.

Long term relationships and, in some cases, preferred supplier status, with marquee

global OEMs in the automobile sector, such as General Motors, Ford Motors,

Hyundai, Maruti Suzuki and Tata Motors gives PCL an edge over the new entrants

in the camshaft industry.

Camshaft manufacturing process at PCL

Source :Precision Camshafts Ltd, Ventura Research

- 3 - Monday, 25th

January, 2016


Key Investment Highlights

Revenue and profit margins are expected to grow

Over FY12 to FY15, revenues of PCL have grown at a CAGR of 21% from Rs 302

crore in FY12 to Rs 532 crore in FY15. The growth is expected to continue at a

CAGR of 13% to Rs 861 crore by FY19E. The growth is expected to be seen on

account of capacity expansion and exponential order inflow.

The EBITDA margin has expanded from 13.8% in FY12 to 26.5% in FY15. The

main reason for the expansion in margins has been due to increased focus on

machined camshafts which command higher margins over raw camshafts. In FY14

the EBITDA margin witnessed a sharp decline (13.4%) which was on account of

ESOP given to employees. The ESOP escalated the employee cost by Rs 50.1

crore. However, this was a onetime cost to the company and excluding this

exceptional cost (which is merely a book entry), the EBITDA margin for FY14 is

24.1%. Going forward, we expect PCL to expand the EBITDA margins to 28.7%

due to increasing focus on value added products viz machined camshafts.

The company reported net profit of Rs 62.4 crore (11.7% PAT Margin) in FY15 as

against Rs 20.3 crore (6.7% PAT Margin) in FY12. Going forward, we expect the

PAT margin to expand by 210 bps to 13.8% on account of lower finance costs as

the company is expected to pay off its debt partly from IPO proceeds and partly

from the advances that the company has given. It is expected that PCL will become

virtually a debt free company by FY19.

Revenue to grow at a CAGR of 13%

0

5

10

15

20

25

30

35

0

1500

3000

4500

6000

7500

9000

10500

FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E

Sales EBITDA PAT

Rs in Mn%


Volume and ASP growth

0

2

4

6

8

10

12

14

16

0

100

200

300

400

500

600


ASP (LHS) Camshafts Sold (RHS)

Rs per CamshaftNos in Mn


- 4 - Monday, 25th

January, 2016


Capacity expansion to drive volume growth

PCL’s total manufacturing capacity as on September 30, 2015 was 13.38 million

camshaft per annum castings from their foundries and 2.22 million machined

camshafts per annum from its machine shops. From the IPO proceeds, PCL

proposes a greenfield expansion by setting up new machine shop (capex of Rs 200

crore approx) with capacity of 9.6 Lacs tons specifically for ductile iron camshafts

and assembled camshafts, respectively, over the period FY17-FY18 and also seek

to foray into manufacturing and supply of sliding cams and cam modules in

accordance with the expansion strategy. The entire capacity of the new foundry is

already booked and is expected to start production from early FY17.

PCL aims to expand foothold in Asia and Europe

Two JV’s in China to meet demand for the Chinese market PCL has entered into two joint ventures with NSPCL. First, Ningbo Shenglong PCL

Camshafts Company Limited, for machining of camshafts and the second, PCL

Shenglong (Huzhou) Specialised Casting Company Limited, for setting up a foundry

in China. The machine shop at Ningbo, China commenced production in April 2013

and the foundry at Huzhou City, China is currently under construction.

Exclusive agreement with EMAG to strengthen our foray into assembled camshafts PCL has entered into a 5 year exclusive agreement with EMAG, a German

machining and tooling process company, for transfer of certain know-how and

technology in order to strengthen its foray into assembled camshafts and expand

PCL’s business operations in the European market. This technology will cater to

almost 80% of the available market for assembled camshafts in the European

market.

Capacity expansion plans

Capacity New Capacity

Particulars Availabile (in Mn) FY12 FY13 FY14 FY15 FY16E post IPO FY17E FY18E FY19E

EOU Unit

Foundry 11.94 77% 59% 66% 80% 70% 14.00 66% 75% 83%

Machine Shop 1.86 97% 52% 53% 55% 50% 3.11 38% 55% 70%

Domestic Unit

One foundry 1.44 86% 87% 79% 33% 70% 1.44 80% 80% 80%

One machine shop 0.36 77% 69% 61% 58% 50% 0.36 63% 65% 70%

Utilization Utilization

Source: Precision Camshafts Ltd, Ventura Research

- 5 - Monday, 25th

January, 2016


Expansion through inorganic growth

As a part of growth strategy PCL seek to acquire or make strategic investments in a

company or companies or business particularly in Europe which are engaged in the

same business or are engaged in the manufacturing of critical component

machining in which we believe we have acquired significant domain knowledge

based on our camshafts manufacturing experience.

Financial Performance

In H1FY16, the consolidated revenue of PCL degrew by 8% YoY to Rs 237.1 crore.

The EBITDA fell from Rs 75.3 crore in H1FY15 to Rs 66.6 crore in H1FY16.

However, margins contracted by 100 bps to 28%. Consolidated PAT fell from Rs 37

crore in H1FY15 to Rs 31.5 crore during the quarter. PAT margin though declined

from 14% in H1FY15 to 13% in Hx1FY16.

For FY15, consolidated revenue increased by 11% YoY from Rs 459.5 crore in

FY14 to Rs 514.4 crore in FY15. The EBITDA margin grew by 21% YoY to Rs 136.4

crore. In FY14, the company issued ESOP and booked a onetime expense of Rs 50

crore. In FY15, margins contracted to 12% as compared to 13.5% (excluding ESOP

expenditure) in FY14.

Half yearly financial performance (Rs crores)

Description H1FY16 H1FY15 FY15 FY14

Net Sales 237.1 256.5 514.4 459.5

Growth -8% 11%

Total expenditure 170.5 181.2 377.9 346.9

EBITDA 66.6 75.3 136.4 112.6

Margin % 28% 29% 27% 25%

Depreciation 20.0 19.7 39.1 27.3

EBIT (Exl. OI) 46.64 55.64 97.29 85.35

Other Income 9.3 7.8 10.6 12.4

EBIT 55.91 63.45 107.85 97.71

Margin % 24% 25% 21% 21%

Finance Cost 4.5 5.0 9.4 12.1

Exceptional Expense 0.0 0.0 0.0 50.1

PBT 51.4 58.5 98.5 35.5

Margin % 22% 23% 19% 8%

Tax Expense 19.9 21.5 34.9 21.4

PAT 31.5 37.0 63.6 14.1

Margin % 13% 14% 12% 3%


- 6 - Monday, 25th

January, 2016


Financial Outlook: With expansion plans in place, the growth trajectory in volumes (4 Yr CAGR of 15%

to 15.18 mn camshafts by FY19) should continue. As PCL is increasingly focusing

on machined camshafts which command better margins over raw camshafts, the

margins will tend to expansion. We expect PCL revenues to grow at a 4 year CAGR

of 13% to Rs 861 crores by FY19E while earnings are expected to grow at a CAGR

of 17% to Rs 119 crore over the same period. The EBITDA margins (ex OI) and

PAT margins are expected to expand by 210bps to 28.7% and 13.8% respectively.

Consolidated Revenue, Gross & PAT margins

0

5

10

15

20

25

30

35

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E

Sales EBITDA PAT

Rs in Mn%


RoCE & RoE

0%

5%

10%

15%

20%

25%

30%


RoE (Adjusted) RoCE


Net working capital days to be around 52 days

0

10

20

30

40

50

60

70

80

90

100

FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E

Debtor Days Inventory Days Creditor Days

No of Days


PCL to become virtually a debt free company

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00


D/E Ratio


- 7 - Monday, 25th

January, 2016


Valuation

We initiate coverage on Precision Camshafts Ltd as a BUY with a price objective of

Rs 241 representing a potential upside of 30% from the Issue price of Rs 180-186

over a period of 14 months. We have used the EV/EBITDA multiple approach to

value PCL & assigned a multiple of 13x on FY17 EBITDA of Rs 172.7 crore to arrive

at the target price. We feel positive about the company due to the following aspects:

1. Capacity expansion to drive volume growth.

2. Increased focus on valued added machined camshafts.

3. Large addressable export market.

4. More focus quality products and company’s attempt to develop itself from

camshaft manufacturer to camshaft designer.

2 year forward EV/EBITDA to 2 year forward EPS Growth

Bharat Forge

Mothersun Sumi

ZF Steering Gear

Jamna Auto Ind

Minda Industries

Cummins IndiaPCL

0

10

20

30

40

50

60

0 5 10 15 20 25

2 Y

r F

wd

Ear

nin

gs

Gro

wth

(%

)

2 Yr Fwd EV / EBITDA


2 year forward PE to 2 year forward ROE

Cummins India

ZF Steering Gear

PCL

Bharat Forge

Mothersun Sumi

Jamna Auto Ind

Minda Industries

0

5

10

15

20

25

30

35

40

0 5 10 15 20 25 30

2 Y

r F

wd

RO

E (

%)

2 Yr Fwd PE


- 8 - Monday, 25th

January, 2016


Financials and Projections

Y/E March, Fig in ` Cr FY14 FY15 FY16E FY17E Y/E March, Fig in ` Cr FY14 FY15 FY16E FY17E

Profit & Loss Statement Per Share Data (Rs)

Net Sales 467.4 532.4 506.7 616.8 Adj. EPS 7.7 6.6 6.7 8.6

% Chg. 13.9 -4.8 21.7 Cash EPS 11.1 10.9 11.3 14.9

Total Expenditure 405.0 391.6 367.4 444.1 DPS

% Chg. -3.3 -6.2 20.9 Book Value 68.5 72.6 104.2 114.1

EBDITA 112.5 140.8 139.4 172.7 Capital, Liquidity, Returns Ratio

EBDITA Margin % 24.1 26.5 27.5 28.0 Debt / Equity (x) 1.1 0.7 0.3 0.2

Other Income 12.6 10.3 15.2 18.5 Current Ratio (x) 1.1 1.2 2.3 1.7

PBDIT 125.0 151.2 154.6 191.2 ROE (%) 15.3 13.2 12.4 12.4

Depreciation 27.8 41.2 43.6 59.6 ROCE (%) 27.2 25.5 14.5 17.2

Interest 12.6 11.2 11.9 6.7 Dividend Yield (%) 0.0 0.0 0.0 0.0

Exceptional items 50.1 0.0 0.0 0.0 Valuation Ratio (x)

PBT 34.6 98.7 99.0 124.9 P/E 24.1 28.3 27.8 21.7

Tax Provisions 21.4 36.3 35.6 43.7 P/BV 2.7 2.6 1.8 1.6

Reported PAT 13.1 62.4 63.4 81.2 EV/Sales 7.1 6.8 38.0 30.1

Minority Interest EV/EBIDTA 28.1 14.6 16.1 11.7

PAT 13.1 62.4 63.4 81.2 Efficiency Ratio (x)

PAT Margin (%) 2.8 11.7 12.5 13.2 Inventory (days) 34.0 30.4 35.3 35.0

Other Inc/ Sales (%) 2.7 1.9 3.0 3.0 Debtors (days) 87.6 71.9 77.0 80.0

Tax Rate (%) 62.0 36.8 36.0 35.0 Creditors (days) 58.0 61.4 62.0 65.0

Balance Sheet Cash Flow Statement

Share Capital 4.1 4.1 17.0 17.0 Profit Before Tax 34.6 98.7 99.0 124.9

Reserves & Surplus 168.1 229.6 555.6 636.8 Depreciation 27.8 41.2 43.6 59.6

Minority Interest Working Capital Changes 12.5 11.6 -40.1 -73.6

Long Term Borrowings 130.5 133.9 126.8 46.8 Others 28.7 -36.3 -21.3 -35.6

Deferred Tax Liability 14.9 0.0 0.0 0.0 Operating Cash Flow 103.5 115.2 81.2 75.3

Other Non Current Liabilities 0.0 0.0 0.0 0.0 Capital Expenditure -38.8 -15.4 -14.0 -123.9

Total Liabilities 317.7 367.7 699.4 700.6 Other Investment Activities -39.7 -16.8 -94.4 -4.1

Gross Block 257.0 272.4 286.4 410.4 Cash Flow from Investing -78.5 -32.1 -108.4 -128.0

Less: Acc. Depreciation 27.8 41.2 43.6 59.6 Changes in Share Capital 0.0 0.0 240.0 0.0

Net Block 229.2 231.2 242.8 350.8 Changes in Borrowings 1.5 -11.5 -7.1 -80.0

Capital Work in Progress 5.0 16.2 111.1 104.0 Dividend and Interest -12.6 -11.2 -5.5 -11.9

Other Non Current Assets 64.8 64.6 64.8 64.9 Cash Flow from Financing -11.1 -22.7 227.4 -91.9

Net Current Assets 12.7 44.0 269.7 158.9 Net Change in Cash 13.9 60.3 200.2 -144.7

Long term Loans & Advances 6.0 11.7 11.0 22.0 Opening Cash Balance 20.3 34.2 94.5 294.7

Total Assets 317.6 367.7 699.4 700.6 Closing Cash Balance 34.2 94.5 294.7 150.0

- 9 - Monday, 25th

January, 2016


Disclosures and Disclaimer Ventura Securities Limited (VSL) is a SEBI registered intermediary offering broking, depository and portfolio management services to clients. VSL is member of BSE, NSE and MCX-SX. VSL is a depository participant of NSDL. VSL states that no disciplinary action whatsoever has been taken by SEBI against it in last five years except administrative warning issued in connection with technical and venial lapses observed while inspection of books of accounts and records. Ventura Commodities Limited, Ventura Guaranty Limited, Ventura Insurance Brokers Limited and Ventura Allied Services Private Limited are associates of VSL. Research Analyst (RA) involved in the preparation of this research report and VSL disclose that neither RA nor VSL nor its associates (i) have any financial interest in the company which is the subject matter of this research report (ii) holds ownership of one percent or more in the securities of subject company (iii) have any material conflict of interest at the time of publication of this research report (iv) have received any compensation from the subject company in the past twelve months (v) have managed or co-managed public offering of securities for the subject company in past twelve months (vi) have received any compensation for investment banking merchant banking or brokerage services from the subject company in the past twelve months (vii) have received any compensation for product or services from the subject company in the past twelve months (viii) have received any compensation or other benefits from the subject company or third party in connection with the research report. RA involved in the preparation of this research report discloses that he / she has not served as an officer, director or employee of the subject company. RA involved in the preparation of this research report and VSL discloses that they have not been engaged in the market making activity for the subject company. Our sales people, dealers, traders and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein. We may have earlier issued or may issue in future reports on the companies covered herein with recommendations/ information inconsistent or different those made in this report. In reviewing this document, you should be aware that any or all of the foregoing, among other things, may give rise to or potential conflicts of interest. We may rely on information barriers, such as "Chinese Walls" to control the flow of information contained in one or more areas within us, or other areas, units, groups or affiliates of VSL. This report is for information purposes only and this document/material should not be construed as an offer to sell or the solicitation of an offer to buy, purchase or subscribe to any securities, and neither this document nor anything contained herein shall form the basis of or be relied upon in connection with any contract or commitment whatsoever. This document does not solicit any action based on the material contained herein. It is for the general information of the clients / prospective clients of VSL. VSL will not treat recipients as clients by virtue of their receiving this report. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of clients / prospective clients. Similarly, this document does not have regard to the specific investment objectives, financial situation/circumstances and the particular needs of any specific person who may receive this document. The securities discussed in this report may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Persons who may receive this document should consider and independently evaluate whether it is suitable for his/ her/their particular circumstances and, if necessary, seek professional/financial advice. And such person shall be responsible for conducting his/her/their own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this document. The projections and forecasts described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projections and forecasts were based will not materialize or will vary significantly from actual results, and such variances will likely increase over time. All projections and forecasts described in this report have been prepared solely by the authors of this report independently of the Company. These projections and forecasts were not prepared with a view toward compliance with published guidelines or generally accepted accounting principles. No independent accountants have expressed an opinion or any other form of assurance on these projections or forecasts. You should not regard the inclusion of the projections and forecasts described herein as a representation or warranty by VSL, its associates, the authors of this report or any other person that these projections or forecasts or their underlying assumptions will be achieved. For these reasons, you should only consider the projections and forecasts described in this report after carefully evaluating all of the information in this report, including the assumptions underlying such projections and forecasts. The price and value of the investments referred to in this document/material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance. Future returns are not guaranteed and a loss of original capital may occur. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. We do not provide tax advice to our clients, and all investors are strongly advised to consult regarding any potential investment. VSL, the RA involved in the preparation of this research report and its associates accept no liabilities for any loss or damage of any kind arising out of the use of this report. This report/document has been prepared by VSL, based upon information available to the public and sources, believed to be reliable. No representation or warranty, express or implied is made that it is accurate or complete. VSL has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. The opinions expressed in this document/material are subject to change without notice and have no obligation to tell you when opinions or information in this report change. This report or recommendations or information contained herein do/does not constitute or purport to constitute investment advice in publicly accessible media and should not be reproduced, transmitted or published by the recipient. The report is for the use and consumption of the recipient only. This publication may not be distributed to the public used by the public media without the express written consent of VSL. This report or any portion hereof may not be printed, sold or distributed without the written consent of VSL. This document does not constitute an offer or invitation to subscribe for or purchase or deal in any securities and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. This document is strictly confidential and is being furnished to you solely for your information, may not be distributed to the press or other media and may not be reproduced or redistributed to any other person. The opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of VSL and are given as of this date and are subject to change without notice. Any opinion estimate or projection herein constitutes a view as of the date of this report and there can be no assurance that future results or events will be consistent with any such opinions, estimate or projection. This document has not been prepared by or in conjunction with or on behalf of or at the instigation of, or by arrangement with the company or any of its directors or any other person. Information in this document must not be relied upon as having been authorized or approved by the company or its directors or any other person. Any opinions and projections contained herein are entirely those of the authors. None of the company or its directors or any other person accepts any liability whatsoever for any loss arising from any use of this document or its contents or otherwise arising in connection therewith. The information contained herein is not intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading, dissemination, distribution or copying of this communication is prohibited unless otherwise expressly authorized. Please ensure that you have read “Risk Disclosure Document for Capital Market and Derivatives Segments” as prescribed by Securities and Exchange Board of India before investing in Securities Market. Ventura Securities Limited

Corporate Office: C-112/116, Bldg No. 1, Kailash Industrial Complex, Park Site, Vikhroli (W), Mumbai – 400079

pcl report

Documents