Notes on. Sundram Fasteners

Transcription

1 11 th September 2018 CMP Notes on Sundram Fasteners About the Company: Sundram Fasteners (SFL) was incorporated in It is a part of the $5 billion TVS Group, headquartered in Chennai, India. With a diversified product line, it has facilities in four countries. The product range consists of high-tensile fasteners, powder metal components, cold extruded parts, hot forged components, radiator caps, automotive pumps, gear shifters, gears and couplings, hubs and shafts, tappets and iron powder. Over the years, SFL has acquired cutting-edge technological competencies in forging, metal forming, close-tolerance machining, heat treatment, surface finishing, and assembly. Raw materials: Industries catered: Steel - 58% Automotive Metal Powder - 4% Infrastructure M.S. Scrap - 3% Windmill Aluminium Ingots - 1.2% Aviation Other components - 33% Countries catered: India, China, Germany, Indigenous Brazil, USA, UK. Italy, France Imported

2 Products: CATEGORY PRODUCTS INDUSTRIES USED FOR APPLICATIONS High Tensile Fasteners - Automotive (Chassis & Engine), - Wind, - Aerospace, - Farm, - Infrastructure Hardware that mechanically joins objects - nuts, bolts, screws. Cold Extrusion Parts - Gear Blanks - Transmission shafts - Cams Starter sleeves & pinions - CV joint parts - Fan hubs - Two wheelers - Front wheel drive vehicles - Internal combustion engines It is a process by which long straight metal parts can be produced. It is done by squeezing metal in a closed cavity through a tool. Hot Forged Parts Powertrain components Pumps & Assemblies Radiator caps - Bevel gear & pinion family - Hub & gen 3 bearing hub rings - RWD clutch hub - Crankshaft sprocket - Stainless steel turbocharger parts - Connecting rods - Turbine shafts - Output shafts - Clutch hub - Sungear shafts - Crankshafts sprockets - Slip Yoke - Water pumps - Oil pumps - Mechanical fuel feed pumps - Manual & Auto belt tensioners - Rocher assemblies - Suspension & precision parts - Fan supports - Camshafts - Metal caps - Regular OEM caps - Mini & Micro sized - Automotive sector It is a process that enables the manufacturing of highly customized parts with complex geometries. - Passengers vehicles - Light & heavy commercial vehicles - Off-road vehicles - Combines - Harvesters - Tractors - Forklifts - Marine engines - Power generation engines - Two wheelers Powertrain - Main components that generate power - engine, transmission, drive shafts.

3 caps - Large diameter caps - Safe T vent - TM Level style caps - Nylon caps - Sombrero ratcheting caps - Dual O-ring caps - Dual O-ring mini caps Powder Metallurgy - Rotors and gears - Synchroniser hub - Shock absorber components - Value train components - Bushes - Structural parts Segments - The company commands a 35 percent market share in the fastener segment, which brings in 40 percent of its sales. The rest 60 percent of revenue comes from motor vehicle parts and accessories. - Business from higher margin products such as hub, shaft, powdered metal components, hot and cold forged products and pump assemblies with margins of 14-22% compared with conventional fastener business with 9-12% margins. - Due to the rising rich product mix, the share of conventional fasteners to revenue came down to 37% in FY16 from 43% in Rise in revenue from high margin products is obvious as shaft and forged business grew at an annualized 36.3% and 34.3%, respectively, between FY11 and FY16 against the company's revenue growth of 7.7% in the same period - Diversification has helped the company shield itself from over-dependence on fasteners, besides helping it to increase content contribution per vehicle and significantly move up the value chain. - The adjacent areas have been pretty profitable for the company. Non-automotive business accounts for around eight of the total. The company is expecting the size to go up. They were targeting doubling it to 15 percent, but it changed in between as prices for wind and solar energy dropped. They have targeted to scale up in solar, wind, construction, oil and gas, aerospace and defense. - It is expected for domestic and export business to grow 13% and 15%, respectively for the next fiscal year. Exports - Sundaram Fasteners aims at growing exports to 50% of its business in 5 years

4 - Out of the 30% export portfolio, about 80% is to North American automotive companies, and they would look to expand the business more there in the coming years In the next 5-6 years, the company expects its export and domestic businesses to contribute equally to overall revenues. - The company s export business has exhibited traction and is expected to improve further, led by an uptrend in the US passenger vehicles market, enhanced supply of new products and overall market share gains. Clients - The company counts some of the top automakers such as Daimler, Tata Motors, Ashok Leyland, M&M, and electric power distribution firm Siemens among its clients. China Plant and CapEx - The company executed its expansion in China with a 10,000-tonne capacity foundry in April, which makes ductile iron for its Chinese customers - Sundaram Fasteners turnover from Chinese operations touched Rs 250 crore at the end of the March 2018 quarter. Also, the management expects the company to achieve a turnover of Rs 1,000 crore from its Chinese operations in the next 10 years. - Last month, SFL inaugurated a second 10,000 tonnes foundry plant to cater to the burgeoning demand for machine castings in China. The company has invested Rs 100 crore in China in the second plant and is one of the few Indian component manufacturers to achieve success in the world s largest automobile market. The China presence has been successful for the company given that there are few Indian manufacturing companies have successes in the country. - China business continues to be profitable. For now, it is catering to the domestic market and clocked Rs 2.5 billion. They are expanding in China with a Rs 1 billion investment for a second plant - The foundry unit is a backward integration effort by its Rs. 250-crore revenue China subsidiary Sundram Fasteners (Zhejiang) Ltd. The 10,000-tonne unit has been set up with an investment outlay of Rs. 100 crore - SFL completed a Rs 200 crore capital expenditure last financial year. Trying to diversify its customer base, the company has also started developing hot forged and wind turbine products. - As far as capacity is concerned, today they have 27 facilities, including one in China and the UK. EVs - On the global drive towards electric vehicles, Arathi Krishna said the company is working with most electric vehicle manufacturers to understand the shift towards hybrid electric vehicles - Up to 30% of Sundaram s portfolio would be affected by an overnight shift to electric vehicles. But hybridization to electric will take a while. They are working with every major electric vehicle player to understand this shift from the very start and this will happen quite gradually. Also, according to the management, a sizeable transition from traditional motor engines to low-carbon electric mobility will happen only by 2040.

5 - With electric mobility picking up the pace, SFL is also gearing up to supply new-age EV cars and has already started catering to two major OEMs. The company is looking to increase its product range to cover EVs and is eyeing supplies to EV manufacturers in India, China, and the USA. - As far as EV is concerned, they are working with all our customers, right from the start, on designing electric vehicles. Though they don't see EVs getting adopted immediately, SFL's 30 percent of the portfolio is geared towards cater to the EV market. They have also formed a task force internally to adapt and strengthen our capabilities. - TVS Group's auto-component maker Sundram Fasteners has accepted an order from Tesla to supply it with key parts in gear transmission and equivalents of radiator caps, according to a report on ETAuto. This development, the company says, will help it move towards the electric era eventually. Sundram Fasteners MD Suresh Krishna confirmed to ET that the supply of bevel gears - teeth-edged parts mounted on the shafts in a gear system - and surge tank caps, which protect coolant, has been on for months now. Brand fee - TV Sundaram Iyengar & Sons Ltd., the ultimate holding company of the TVS group of companies, is thinking of imposing a fee on its group companies which want to use the TVS brand. - Today, the companies within the group are used to use the TVS name provided 25% or more is held by the group. They are exploring the possibility of royalty type payment for the use of TVS name. It is in the early stages. Future Considerations - The company is hopeful of growing in double digits for the next 2-3 years. They have been investing Rs crore over the past few years and expect to invest Rs 350 crore for organic expansion in FY They are keeping up with requirements from customers and also moving geographically closer to them. - The Board of Directors of the company at a recent meeting have given their consent to raise funds through issue of non-convertible debentures (NCDs) not exceeding Rs.500 crore on Private Placement basis. - They could potentially look for 1-2 more plants, depending upon the expansion of OEMs, whether is Gujarat or Andhra Pradesh.

6 INDUSTRY - AUTO COMPONENTS - Over the last decade, the automotive components industry has registered a CAGR of 14 percent and has scaled three times to US$ 43.5 billion in while exports have grown at a CAGR of 14 percent to US$ 10.9 billion. - The Indian auto-components industry is expected to register a turnover of US$ 100 billion by 2020 backed by strong exports ranging between US$ billion by The auto-components industry accounts for almost seven percent of India s Gross Domestic Product (GDP) and employs as many as 19 million people. - India is expected to become the 4th largest automobiles producer globally by 2020 after China, US & Japan. The auto components industry is also expected to become the 3rd largest in the world by The auto-components industry is expected to follow OEMs in the adoption of electric vehicle technologies. The global move towards electric vehicles will generate new opportunities for automotive suppliers. The mass conversion to electric vehicles may generate a US$ 300 billion domestic market for EV batteries in India by India is set to break into the league of top 5 vehicle-producing nations. - 3rd largest steel producer globally hence has a cost advantage. Also, India is emerging as a global hub for auto component sourcing. - Relative to competitors, India is geographically closer to key automotive markets like the Middle East & Europe percent FDI allowed under automatic route for the auto component sector. - In September 2015, Automotive Mission Plan was unveiled which targets a fourfold growth for the sector.

7 - Strong support for R&D & product development by establishing NATRiP centers is expected. - The number of manufacturing units in the unorganized sector is far higher than those in the one and 10,000 unorganized (Organised ~7.25%). Turnover - 85% - organized and 15% is unorganised - Production of Two Wheelers, Passenger Vehicles, Commercial Vehicles, and Three Wheelers reached million (79.61%), 4.01 million (13.79%unorganized), 0.89 million (3.08%), and 1.02 million (3.51%) in Passenger vehicles had the highest share of total auto component supplies to Original Equipment Manufacturers (OEMs) in , followed by and Medium and Heavy Commercial Vehicles (M&HCV).

8 - As per Automobile Component Manufacturers Association (ACMA) forecasts, automobile component exports from India are expected to reach US$ 70-billion by 2026 from US$ 10.9 billion in FY17. The Indian auto component industry aims to achieve US$ 200 billion in revenues by The industry is expected to post a percent growth rate in FY18, on the back of robust growth in the domestic passenger vehicle, commercial vehicle, tractor and two-wheeler segments. - Auto-component production in is expected to increase percent in FY19, on the back of robust growth in domestic and export markets. - India s exports of auto components increased at a CAGR of 9.96 percent, during FY09-FY17, with the value of auto component exports increasing from US$ 5.1 billion in FY09 to US$ 10.9 billion in FY17. - Europe accounted for a volume share of 35 percent during FY17 in Indian auto component exports followed by Asia and North America with 27 and 26 percent respectively in the same year. - Auto-component exports from India are expected to grow 7-9 percent in FY18, backed by stronger global growth and higher exports to emerging nations. Growth is further expected to accelerate to 8-10 percent in FY19 due to pick up in the global scenario. - Policies such as Automotive Mission Plan , Faster Adoption & Manufacturing of Electric Hybrid Vehicles (FAME, April 2015), NMEM 2020, likely to infuse growth in the auto component sector of the country. - Both domestic & export markets are almost similar in terms of potential share by different product types. For example, Engine & Exhaust components, along with Body & Structural parts, are expected to make up 50 percent potential domestic sales as well as exports in Transmission, Steering components, Electronics & Electrical parts are likely to be the other key products.

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10 Peers: SUNDRAM FASTENERS STERLING TOOLS SIMMONDS MARSHALL Incorp. Year Products High tensile fasteners, Pumps & assemblies and radiator caps. High Tensile Fasteners Nylon self-locking nuts International Standards N.A. Indian, German, Japanese, American, British. American, British, Japanese, Indian. Manufacturing facilities Tamil Nadu, A.P. and Uttarakhand. Faridabad (Haryana) N.A. Customer Type Passenger cars, LCV and HCV 2 wheelers, LCV & HCV, agri-equipment & construction equipment. N.A. Customers N.A. N.A. Fiat, Ford, Honda, Tata, Daewoo, Ashok Leyland, Suzuki, Mahindra, General Motors and many more. Exports (% of sales) 30% 10% 9.5% Revenue Break-up 37% from fasteners & rest from non-auto components. N.A. 100% nylon self-locking nuts

11 Peers (Financial Comparison) SUNDRAM FASTENERS STERLING TOOLS SIMMONDS MARSHALL Market Cap (Rs. Cr.) Sales (Rs. Cr.) Sales Growth (10 yrs) 8.77% 10.33% 19.11% PAT (Rs. Cr.) PAT Growth (10 yrs) 33.27% 18.80% 8.36% PAT Margin (%) 9.98% 9.18% 3.54% ROA (%) 14.08% 13.64% 5.83% ROE (%) 28.05% 26.84% 12.22% ROCE (%) 28.37% 32.82% 14.07% Cash Conversion Cycle Total Debt/Equity (x) Interest Cover (x) TTM P/E (x) P/BV (x) EV/TTM EBITDA M. Cap/TTM Sales

12 Subsidiaries: SN Name Location Nature % shares About 1. Sundram Fasteners Investments Ltd Dr.Radhakrishnan Salai, Mylapore, Chennai Domestic 100% - 2. TVS Upasana Limited (formerly - Upasana Engineering Limited) Dr.Radhakrishnan Salai, Mylapore, Chennai & Hosur Domestic 100% Manufacturer of spokes and nipples for all the major OEM s in India 3. Sundram Non-Conventional Energy Systems Ltd Dr.Radhakrishnan Salai, Mylapore, Chennai Domestic 52.94% Electric power generation using other non-conventional sources 4. Sundram Precision Components Ltd (formerly - Sundram Bleistahl Limited) Dr.Radhakrishnan Salai, Mylapore, Chennai Domestic 100% Manufacture of general-purpose machinery 5. TVS Infotech Ltd Dr.Radhakrishnan Salai, Mylapore, Chennai Self: 54.61% Held through subsidiary: 11.69% Enterprise Solutions provider for core industries like Manufacturing, Automotive, and Distribution. 6. TVS Next Private Limited (formerly Blisslogix Technology Solutions Private Limited) Dr.Radhakrishnan Salai, Mylapore, Chennai Step down effective 11th April, Infotech Ltd % It enables businesses to build next-generation solutions. 7. TVS Infotech Inc East Independence Blvd, Suite 102, Charlotte Step down 66.30% Enterprise Solutions provider for core industries like Manufacturing, Automotive, and Distribution 8. Cramlington Precision Forge Ltd North Nelson Industrial Estate, Cramlington, Northumberland, The United Kingdom, Step down effective 31st March, Sundram International Ltd 100% Products consist differential gears, dog tooth clutches, hydraulic pump gears, power tool components, tractor differential gears etc 9. Sundram Fasteners (Zhejiang) Ltd Wuyuan Town, Haiyan County, Step down 100% Manufacturing components for the

13 Jiaxing City, Zhejiang Province, China effective 31st March, Sundram International Ltd Automotive industry. 10. Sundram International Inc Troy, Michigan, United States of America Foreign 100% Sundram International Limited New Castle Upon Tyne, England NE1 3XX, United Kingdom Foreign 100% - TVS Group: TVS group began as a provider of bus transportation services. TVS group, a 100-year-old group, includes more than 60 companies. TV Sundram Iyengar & sons Pvt Ltd., established in 1911 is the parent company of TVS Group and is leading in automobile distribution. Suresh Krishna, ex-m.d. of SFL is the current Chairman of TVS group. TVS only as a distribution company. All the directors make sure that there is no competition between group companies. TVS & Sons is more an overseeing company rather than a policy company. Group has identified 3 major operations: manufacturing, distribution, and logistics. Group mainly focuses on exports and putting plants abroad. TVS & sons is thinking of imposing a fee on its group companies which want to use the TVS brand. Companies in which TVS & sons have more than 25% stake are allowed to use TVS name. Suresh Krishna In 1962, Suresh Krishna was given the responsibility of starting Sundram Fasteners. Mr. Krishna grew into the role mostly through hands-on experience. He has also served as president of Automotive Component Manufacturers Association (ACMA) of India. He was awarded Padma Shri in He recently stepped down as managing director of SFL and his daughter Arathi Krishna has taken the role of Managing Director.

14 Management Personnel:

15 Financials PROFIT & LOSS Report Date Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Sales Raw Material Cost Change in Inventory Power and Fuel Other Mfr. Exp Employee Cost Selling and admin Other Expenses Other Income Depreciation Interest Profit before tax Tax Net profit Dividend Amount Growth Trends: 10Yr 7Yr 5Yr 3Yr Sales Growth 9% 8% 8% 7% OPM 12% 12% 12% 13% PAT Growth 32% 19% 33% 43% Avg. PE

16 BALANCE SHEET Report Date Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Equity Share Capital Reserves Borrowings Other Liabilities Total Net Block CWIP Investments Other Assets Total Receivables Inventory Cash & Bank No. of Equity Shares New Bonus Shares Face value CASH FLOW: Report Date Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Cash from Operating Activity Cash from Investing Activity Cash from Financing Activity Net Cash Flow

17 Final View: The company being an FMIG, the demand is not going to be an issue but the growth rate at which demand pitches in will always be a big question. Some the major possible factors that can lead the company on a growth path are growth in the industry, diversification in product profile (segments) and the industries it can cater to (non-conventional), regular capital expenditure, giving a boost to the exports and being more price competitive. The company stands as a market leader in fasteners segment commanding ~35% of the market share but still, the sales is growing at a rate less than that of the industry. It has been reporting regular free cash flow with reducing debt. Company is also planning number of measures like increasing exports to half of the total sales in coming 5-6 years (Domestic and exports both accounting to 50% individually), diverging more into non-conventional areas which command a better margin than conventional areas of operations etc, collectively, which will ensure fruitful growth over the coming decade. Given the capital-intensive nature of the business, the company is required to infuse capital on regular basis and the current business structure is more about the margin play than that of volume. Steel being a major raw material, directly impacts the margin the company operates at. The company has a cash conversion cycle of around 3 months, which puts a pressure on the working capital requirement. On one side, the company stands out with experienced and promising management personnel, whereas, on the other hand, there lies a significant room for the company to improve on its operating and efficiency parts. On one side, the company appears appealing with its future plans and industry prospects, whereas, on the other hand, despite being a market leader, the company has failed to keep up and match with the industry growth. One major issue that was faced while studying the company was lack of information on many fronts. The company hasn t been very transparent about its doing which a company of this scale is expected to be. Author: Slesha Choksi Karan Agarwal ( slesharesearch@gmail.com ), ( karan.agarwal0111@gmail.com ) Disclaimer: This report is prepared strictly for educational purpose and should not be used as an investment guide. The forward-looking statements contained are simply the author s opinions.

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