sandhar technologies -...

Steep valuations make Risk‐reward unfavourable; Avoid

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Sandhar Technologies

March 16, 2018

IPO Note

Saksham Kaushal [email protected] +91‐22‐66322235

Poorvi Banka [email protected] +91‐22‐66322426

Rating Avoid

Price Band Rs327‐332

IPO Fact Sheet

Opening Date Mar 19, 2018

Closing Date Mar 21, 2018

BRLMs ICICI Securities Ltd & Axis Capital Ltd

Issue Size Rs5.12bn

Issue Details Pre‐issue equity (m shares) 51.2

Fresh issue of shares (m shares)* 9

Offer for sale 6.4

Post‐issue equity (m shares)* 60.1

Post‐issue Market Cap (Rsbn)* 20

Share Holding (%) Pre‐IssuePost‐Issue*

Promoters 82.5 70.3

Public & Others 17.5 29.7

*Equity issuance calculated on upper price band

Objects of the Issue The Company will use the proceeds from the IPO(upto Rs2.25bn of total Rs3bn) towards debtrepayment and the rest will be used for generalcorporate purposes. The IPO comprises of fresh issue of 9mn shares for Rs3bn and offer for saleof 6.4mn shares by private equity investor GTIwhich forms ~12.5% of pre‐issue equity.

Sandhar Technologies Ltd is engaged in the manufacturing a diverse range of

automotive components and systems, primarily focusing on safety and security

systems for automobiles across segments. It is the market leader for two‐wheeler

locking systems & rear view mirrors as well as commercial vehicle rear view mirror

segment in India. It is also one of the largest manufacturers of operator cabins.

The company has 31 manufacturing facilities strategically located in automotive

hubs in India, 2 facilities in Spain & 1 in Mexico and is in the process of commissioning

another 5 plants in the next fiscal. The company supplies to 79 OEMs globally

including Hero, Ashok Leyland, Honda Cars, TAFE, Tata Motors, TVS, etc. In the last

12 years, the Company has received investment from two private equity investors,

namely Actis Group (entered in 2005 and exited in 2012) and GTI.

STL’s Revenue and EBITDA have grown at a CAGR of 9% & 12.4% respectively over

FY13‐17, with return ratios of ~13%. While revenue growth was muted at 7.6% YoY in

FY17, owing to motorcycle industry being flattish & Honda cars (forming ~8% of

revenue) seeing a decline, H1FY18 saw revenue growth of over 20% YoY on account

of STL's increasing share in scooters, Honda cars picking up again, construction

equipment business up 40% YoY, etc. The management expects H1FY18 growth

momentum to continue ahead, however, given the high dependence on certain

segments (two‐wheeler segment contributes ~58% of revneues) and customers (top 5

customers of the Company form ~70% of overall revenues), costs/risks associated

with new facilities/new segments to be commissioned next fiscal, etc., we are

skeptical of the same. The next trigger for growth is expected from segments fuel

injection systems, power filters and auto electronics (STL has 6 JVs for technological

support) but the company has not yet entered any of these aforesaid segments.

The Company is looking at raising Rs3bn through fresh issue, while there is an

additional OFS for 6.4mn shares by its private investor GTI. The post issue market cap

for the Company at the upper band works out to be ~Rs20bn. At the consolidated

level, the company will trade at steep valautions of 50x FY17 earnings, while at

FY18E too it is expensive at ~29x. Its closest competitors, Minda Corp and Minda

Industries, are currently trading at 26x and 40x FY18E, respectively. Given the

expensive valuations, low quality business, volatile past performance, high customer

concentration (HMCL forms ~30% of revenues) and unconvincing story, we

recommend ‘Avoid’.

Key financials FY14 FY15 FY16 FY17

Revenues (Rs m) 12,650 14,821 15,132 16,269

Growth (%) 9.1 17.2 2.1 7.5

EBITDA (Rs m) 1,163 1,392 1,413 1,458

PAT (Rs m) 332 384 338 396

EPS (Rs) 6.6 7.5 6.5 7.7

Profitability & Valuation FY14 FY15 FY16 FY17

EBITDA margin 9.2 9.4 9.3 9.0 RoCE 16.2 15.8 13.5 12.9

FCF (155) (117) 362 (171)

ROE 17.2 16.6 12.7 13.8

Source: Company Data

March 16, 2018 2


Exhibit 1: Issue Details

Company Sandhar Technologies Ltd

Profile

Sandhar Technologies Ltd is the customer centric component supplier; primarily catering to automotive Original Equipment Manufacturers (“OEMs”) and largely focused on safety and security systems of vehicles with a pan India presence and a growing international footprint. Company is the leader in the 2‐wheeler locking systems market and the commercial vehicle rear view market in India, and is one of the two largest companies catering to the commercial vehicle locking systems market and the two wheeler rear view market in India. Company’s customer portfolio consists of 79 Indian and global OEMs across various segments viz. Hero, TVS, Royal Enfield, Honda Cars, Tata Motors, Atlas Capco, Caterpillar and Forza Medi and others.

Offer Period Opens On : Monday, March 19, 2018

Closes On : Wednesday, March 21, 2018

Price Band Rs. 327/‐ to Rs. 332/‐

Bid Lot 45 Equity Shares & in multiple of thereafter

Issue Size Fresh issue for Rs3bn and Offer for sale of 6.4mn shares by Private equity investor GTI

Issue Size (In Rs) Rs5.12bn

QIB 50% of the Issue (Rs2.56bn)

NIB 15% of the Issue (Rs770mn)

Retail 35% of the Issue (Rs1.79bn)

Mode of Payment ASBA Mandatory (No Cheques will be accepted)

Registrar Link Intime India Private Ltd

Lead Manager ICICI Securities Ltd & Axis Capital Ltd

Listing NSE and BSE


March 16, 2018 3


Company History

Founded by Mr. Jayant Davar, the Company was incorporated as ‘Sandhar Locking Devices Private Limited’ on October 19, 1987, at New Delhi, India. From being a manufacturer of only Sheet metal components & two‐wheeler locks with just one customer Hero (formerly Hero Honda), the company today manufactures 21 categories of products supplying to 79 OEM customers globally. In the past decade, the company has made four acquisitions (of which one was international – Spain) and has entered in six JVs for technological support.

Promoter’s Background

Jayant Davar, aged 56 years, is the Co‐Chairman and Managing Director of the

Company. He is the founding Director, and is the Promoter of the Company. He holds

a bachelors’ degree in mechanical engineering from the Punjabi University, Patiala,

and has successfully completed the president management programme from the

Harvard Business School. He was the chairman of the Confederation of Indian

Industries, Northern Region, and has been the president of the Auto Component

Manufacturers Association in the past. He has three decades of experience in the

auto components sector.

Dharmendar Nath Davar is the Chairman and Non‐Executive, Non‐Independent

Director of the Company. He was first appointed as a Director on July 2, 1994. He has

a bachelors’ degree in commerce, and a masters’ degree in arts (economics) from

Delhi University. This apart, he is a certified associate by the Indian Institute of

Banking and Finance. He is a former chairman of the Industrial Finance Corporation

of India. He has over five decades of experience in the fields of finance, banking,

corporate laws, and management.

Arvind Joshi is the Whole‐time Director of the Company. He was appointed as a

Director on May 31, 2013. He was first appointed as the CFO and Company Secretary

on December 4, 2006. He holds a bachelors’ degree in science from the University of

Calcutta, a bachelors’ degree in law from the University of Delhi, and is an Associate

Member of the Institute of Chartered Accountants of India, as well as the Institute of

Company Secretaries of India.

Monica Davar is a Non‐Independent, Non‐Executive Director of the Company. She

was first appointed as a Director in 1987. She completed her pre‐university studies in

the commerce stream. She has over 20 years of experience in the auto components

sector.

Mohan Lal Bhagat is an Independent Director of the Company. He was first appointed as an Independent Director in 1993. He holds a bachelors’ degree in commerce from the University of Calcutta. He has 17 years of experience in the areas of financial and management consultancy.

Other independent directors of the company are Ravinder Nagpal, Krishan Lal Chugh, Arvind Pande, Arvind Kapur, Arjun Sharma.

March 16, 2018 4


Automobile Industry Overview

The two wheelers segment dominates the Indian auto industry (~80% by volumes)

and primarily dictates its tone. A robust 5.3% CAGR (during FY12‐FY17 period) in

total two wheeler sales accelerated auto industry growth, along with a 4% growth in

the passenger vehicles segment. On the other hand, a 2% drop in commercial

vehicles sales and subdued growth in tractors by 1.7% added to the pressure over

this period.

Exhibit 2: Segmental share (by volume) of automobile industry


Going ahead, CRISIL Research projects the two‐wheeler industry to grow at a faster

pace of 14‐16% in 2017‐18, compared with 7% in 2016‐17. Over the longer horizon,

CRISIL Research estimates demand to grow at a robust CAGR of 8‐10% till 2019‐20,

to ~23 million units. It expects motorcycle sales to expand at 6‐8% CAGR on the back

of rural demand and premium launches. Scooter sales is likely to grow at 13‐15%

CAGR, led by positive structural factors such as convenience, perceived higher utility

in intra‐city transport, and growth in demand from urban and semi‐urban areas.

The domestic PV industry is expected to grow at 10‐12% in 2017‐18 over the high

base of 2016‐17. Improved GDP (7% in 2017‐18) and crop output (normal monsoon)

will support demand growth. Pay commission arrears, improving rural sentiments

and continued traction for popular models are expected to give a push in 2017‐18.

MSIL's additional capacity, which became operational in February 2017, will also

provide thrust to volume growth.

MHCV sales are likely to grow at a moderate 2‐4% CAGR during 2017‐18 to 2021‐22

(five‐year CAGR), outpacing the previous corresponding period's growth. Driving

factors would be improving industrial activity, steady agricultural output, and the

government’s focus on infrastructure. However, full recovery will be limited due to

efficiencies achieved from the GST and better road infrastructure along with the

March 16, 2018 5


commissioning of the dedicated freight corridor. LCV demand is expected to expand

at 9‐12% CAGR during 2017‐18 to 2021‐22 due to higher consumption expenditure

and continued replacement of large three‐wheelers.

Tractor sales revived in 2016‐17, rising 18% YoY, on the back of a normal monsoon.

The tractor industry is expected to fare better in 2017‐18 (expected to grow 11‐13%

YoY as per CRISIL), supported by near‐normal and the government's focus on rural

development. Over the longer term, i.e. between 2016‐17 and 2021‐22, tractor

exports are expected to grow at 8‐10% CAGR.

Automotive Component Industry

Exhibit 3: Automotive component domestic demand trajectory


Domestic demand is primarily from OEMs and the replacement market. Due to an economic downturn in 2013‐14, the auto component industry saw the sharpest decline. In 2016‐17, domestic auto‐component production is estimated to have grown 6.9% on‐year, on the back of a 7‐9% on‐year rise of OEMs and a marginal 1% on‐year increase in exports. Demonetisation, though, impacted the rural‐dependent segments in the second half of the fiscal.

In 2017‐18, CRISIL Research projects domestic auto‐component production to grow 9‐11% on‐year, aided by 11‐13% YoY growth in the OEM segment and 7‐9% YoY increase in the replacement market. Over the long term, i.e. between 2016‐17 and 2021‐22, CRISIL Research expects domestic auto component production to grow at 10‐12% CAGR to ~Rs4,565bn, with OEM and exports growing at 10‐12% CAGR.

March 16, 2018 6


Exhibit 4: Automotive component exports trend


Exhibit 5: Key regulations across vehicle segments driving up realisations


March 16, 2018 7


Company Operations

Sandhar Technologies Ltd is a customer centric component supplier primarily

catering to automotive OEMs and largely focused on safety and security systems of

for automobiles, entailing locking systems, vision systems, door handles, sheet metal

components, cabins & fabrications and auto electronics. It is the leader in the two‐

wheeler locking systems market, and the commercial vehicle rear view market in

India, and is one of the two largest companies catering to the commercial vehicle

locking systems market, and the two‐wheeler rear view market in India. It is also one

of the two largest manufacturers of operator cabins in India, along with being the

largest player in the excavator cabins market. The company supplies to 79 OEMS

including Tier I suppliers across segments globally. Segment‐wise, two‐wheelers,

four‐wheelers (PC, CV & Tier I) and the Off the Highway segment form ~58%, 32%

and 9%, of the Company’s overall revenues respectively.

Exhibit 6: STL’s customer portfolio across segments


Presently, it manufactures 21 categories of products, including such product

categories that are manufactured through Subsidiaries and Joint Ventures, which

cater to different industry segments. Their portfolio comprises various categories of

products including safety and security systems such as lock assemblies, mirror

assemblies, operator cabins for off‐highway vehicles, aluminium spools, spindles,

and hubs. Other product categories include wheel assemblies, handle bar

assemblies, brake panel assemblies, sheet metal components such as fuel filler caps,

fuel cock assembly, step pillions, tools, dies, moulds, other aluminium components,

crane and tractor parts, plastic and painted parts such as door handles (inner and

outer), panels for televisions, and cabinets for air conditioners. The company has

also entered into the following joint venture arrangements:

March 16, 2018 8


Exhibit 7: STL’s has entered in six JVs for technological support


The Company has 31 manufacturing facilities across eight states in India, two

manufacturing facilities in Spain, and one manufacturing facility in Mexico. Further, it

is in the process of commissioning five manufacturing facilities in India over the next

fiscal.

In the last 12 years, the Company has received investment by two private equity

investors, namely Actis Group (entered in 2005, exited in 2012) and GTI.

Reasons for IPO

The Company will use the proceeds from the IPO (upto Rs2.25bn of total Rs3bn)

towards its long term debt repayment and the rest will be used for general corporate

purposes.

Key Risks

The Company depends on a limited number of customers for a significant portion of

their revenues. The loss of a major customer or significant reduction in production

and sales of, or demand for the products from their major customers may adversely

affect the business. Revenue from top five customers constituted ~67.2% of their

consolidated income from operations(net) for FY17 and 70.3% for H1FY18.

Exhibit 8: Top five customers of the company & their revenue contribution


March 16, 2018 9


The company relies significantly on the two‐wheeler market (particularly the

Motorcycle market while it has entered the scooter market too off late) and any

adverse changes to the demand in the two‐wheeler market could adversely impact

their business, results of operations and financial condition. Revenue from two‐

wheeler OEMs constituted 54.6% and 58.6% for FY17 and H1FY18, respectively.

The Company relies heavily on certain third parties. For instance, it depends on one

supplier for procurement of glass required for manufacturing rear view mirror who

supplies more than 90% of their total glass requirement. For H1FY18 and FY17, glass

accounted for 1.78% and 1.82% of the total raw material cost.

The Company had incurred a loss of ~Rs350mn over FY17 on account of 13 of its

manufacturing units making loss at the PBT level. This was mainly owing to

investment in new plants ahead of the demand from customers. While this loss has

significantly reduced and 9 of the 13 loss making units have turned positive, the

company is commissioning another 5 units in the coming fiscal which may again face

ramp up issues impacting margins.

Commodity price movement will have an impact on margins for the company given

the products included in the portfolio of the company. With exports forming ~11% of

overall revenues, the company is exposed to currency fluctuation risk too.

STL also depends heavily on its promoter Mr. Jayant Davar and any change in

services rendered by him may significantly impact the business.

March 16, 2018 10


Financials at a glance

Exhibit 9: Growth over FY16‐17 muted; H1FY18 growth over 20%

9.1

17.2

2.1

7.5

‐

5.0

10.0

15.0

20.0

‐

5,000

10,000

15,000

20,000

FY14 FY15 FY16 FY17 H1FY18

Revenue (Rs m) % growth (RHS)

Source: RHP, PL Research

Exhibit 10: PAT expected to see significant improvement in FY18

73.3

15.5

(12.1)

17.2

(20.0)

‐

20.0

40.0

60.0

80.0

‐

100

200

300

400

500


PAT (Rs m) % growth (RHS)


Exhibit 11: EBITDA growth for FY17 low at just ~3%

24.9

19.6

1.6 3.2

‐

5.0

10.0

15.0

20.0

25.0

30.0

‐

500

1,000

1,500

2,000


EBITDA (Rs m) % growth (RHS)


Exhibit 12: Margin trajectory remained flattish over FY14‐17

8.0 9.2 9.4 9.3 9.0

10.3

‐

2.0

4.0

6.0

8.0

10.0

12.0

FY13 FY14 FY15 FY16 FY17 H1FY18

EBITDA margins


Exhibit 13: Capex of ~Rs6.5bn over FY13‐H1FY18

1,185

904

1,113 1,075 1,101 970

‐

200

400

600

800

1,000

1,200

1,400


Capex (Rs m)


Exhibit 14: Most of the capex behind, FCF likely to improve

(252)

(155)(117)

362

(171)

138

(300)

(200)

(100)

‐

100

200

300

400


FCF (Rs m)


March 16, 2018 11


Financials

Exhibit 15: Consolidated P&L Statement (Rs m)

FY13 FY14 FY15 FY16 FY17

Revenue

Revenue from operations (gross) 12,599 13,698 16,062 16,437 17,650

Less: Excise duty 1,000 1,048 1,241 1,305 1,381

Revenue from operations (Net) 11,600 12,650 14,821 15,132 16,269

Other income 23 39 53 47 67

Expenses

Cost of raw material 7,350 7,688 9,115 9,026 9,602

Change in inventories (155) 43 (38) (13) (91)

Employee benefits expenses 1,562 1,602 1,843 2,018 2,354

Other expenses 1,913 2,153 2,510 2,688 2,945

Total Expenses 10,669 11,487 13,429 13,719 14,811

EBITDA 931 1,163 1,391 1,413 1,458

Depreciation & Amortization 359 394 524 552 603

Other income 39 42 57 52 72

Finance costs 356 394 410 424 427

Profit before Exceptional items and tax 254 418 514 490 500

Exceptional items ‐ ‐ ‐ 37 5

Profit before tax 254 418 514 452 495

Provision for Tax 62 85 130 115 99

Profit after tax 192 332 384 337 396

Less: Minority Share in Profits 1.3 1.3 1.2 3.0 3.7

Net Profit 191 331 383 335 392

EPS (Rs.) 3.8 6.6 7.5 6.5 7.7


Exhibit 16: Consolidated Cash Flows (Rs m)

Particulars FY13 FY14 FY15 FY16 FY17

Net Cash Flow from Operating activities 933 749 996 1,437 930

Net Cash Flow Used In Investing activities (1,243) (817) (1,129) (1,065) (1,050)

Net Cash Flow From Financing activities 297 (18) 203 (412) 148

Net Cash Generated (13) (86) 70 (40) 28

Capex (1,185) (904) (1,113) (1,075) (1,101)

FCF (252) (155) (117) 362 (171)


March 16, 2018 12


Exhibit 17: Consolidated Balance Sheet (Rs m)

FY13 FY14 FY15 FY16 FY17

Equity and liabilities

Shareholders' funds

Share capital 94 94 102 512 512

Reserves and surplus 1,699 1,977 2,490 2,225 2,502

Total of Shareholders' funds 1,793 2,071 2,592 2,736 3,013

Share application money pending allotment ‐ 15 ‐ ‐ ‐

Minority Interest 13 14 16 18 22

Non‐current liabilities

Long‐term borrowings 1,328 1,262 1,668 1,945 2,092

Deferred tax liabilities 140 145 106 80 83

Long term provisions 1 2 ‐ 6 8

Other Long Term Liabilities ‐ ‐ ‐ 57 51

Total of Non‐current liabilities 1,470 1,409 1,774 2,088 2,235

Current liabilities

Short‐term borrowings 895 1,483 1,423 1,247 1,833

Trade Payables ‐ ‐ ‐ ‐ ‐

Dues of micro and small enterprises 100 136 124 123 150

Dues of trade payable other than MSMEs 1,523 1,700 2,124 2,127 2,213

Other current liabilities 864 991 979 1,219 1,138

Short term provisions 46 81 129 95 138

Total of current liabilities 3,428 4,392 4,780 4,811 5,471

Total 6,704 7,902 9,161 9,654 10,741

Assets

Non‐current assets

Tangible assets

Property, Plant and Equipment 3,770 4,115 4,607 5,143 5,839

Intangible assets 46 69 155 135 120

Capital work in progress 205 263 405 552 292

Total 4,021 4,447 5,167 5,830 6,251

Goodwill on consolidation 12 7 0 7 5

Non‐current investment 30 30 30 31 31

Deferred tax assets 4 0 3 6 10

Long‐term loans and advances 178 293 162 163 157

Other non‐current assets 21 0 2 ‐ 7

Total of non‐current assets 4,266 4,778 5,364 6,037 6,462

Current Assets

Current investment 37 0 ‐ 10 10

Inventories 1,166 1,299 1,572 1,598 1,671

Trade receivables 980 1,514 1,876 1,667 2,093

Cash and bank balances 63 27 73 60 73

Short‐term loans and advances 184 282 252 275 303

Other current assets 7 2 24 7 129

Total of current assets 2,437 3,124 3,797 3,617 4,280

Total 6,704 7,902 9,161 9,654 10,741


March 16, 2018 13


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Rating Distribution of Research Coverage PL’s Recommendation Nomenclature

45.0% 43.4%

11.6%

0.0%0%

10%

20%

30%

40%

50%

BUY Accumulate Reduce Sell

% of Total Coverage

BUY : Over 15% Outperformance to Sensex over 12‐months

Accumulate : Outperformance to Sensex over 12‐months

Reduce : Underperformance to Sensex over 12‐months

Sell : Over 15% underperformance to Sensex over 12‐months

Trading Buy : Over 10% absolute upside in 1‐month

Trading Sell : Over 10% absolute decline in 1‐month

Not Rated (NR) : No specific call on the stock

Under Review (UR) : Rating likely to change shortly

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