Jamna Auto: World's 2nd largest spring maker?

Jamna Auto: World's 2nd largest spring maker?
4 Feb, 2008, 0005 hrs IST,Santanu Mishra, TNN

India is emerging as a global outsourcing hub for automotive components and systems. Domestic auto component makers have capitalised on this by scaling up their operations to global size. This has made Indian component vendors like Bharat Forge and Amtek Auto world leaders in their segment.

Many companies are now following in their footsteps, including Jamna Auto Industries, the country’s largest manufacturer of leaf springs. The company is undertaking aggressive capital expenditure (capex) to emerge as the world’s second-largest spring manufacturer by ’10. This provides an attractive growth opportunity for investors willing to stay invested for three years. Besides, the company is a good turnaround story as it was struggling financially till FY06.

Business:

Jamna Auto is the world’s seventh-largest manufacturer of leaf springs with a total installed capacity of 118,000 tonnes and 62% market share in India. Its plants are located in Chennai, Malanpur (MP) and Yamuna Nagar (Haryana). Primarily used in the suspension systems of commercial vehicles, leaf spring is a low technology and volume-driven business. The industry requires large upfront capital investment, creating an entry barrier for new entrants.

Growth drivers:

Having restructured its operations, the company has now embarked on an ambitious growth plan. Recently, it acquired the manufacturing assets of Tata Motors’ leaf spring division. The assets will be used for the company’s upcoming 60,000-tonne plant at Jamshedpur.

The proposed plant will service Tata Motors’ Jamshedpur unit and also export to European markets. Jamna Auto plans to set up a unit in Pantnagar to service two of its largest customers, Tata Motors and Ashok Leyland, which have set up units there. Proximity to these two companies will reduce Jamna Auto’s freight cost and improve its operating margin. The company also plans to more than double the capacity of parabolic springs to 50,000 tonnes by FY10.

Financials:

The company’s net sales witnessed a five-year compound annual growth rate (CAGR) of 31.5% to touch Rs 278 crore in FY07. Its operating profit jumped by over 10 times during the same period. But its net profit has only grown by three times in the past three years; Jamna Auto posted losses in the two years prior to that. Its operating margin of 8% is slightly lower than that of its peers like Rico Auto and Omax Autos. But this is likely to improve in future, as its capacity utilisation increases and its production of parabolic springs expands.

Valuations:

Jamna Auto’s current market capitalisation is Rs 127 crore, which is around half its FY07 net sales. Going forward, we expect the company to grow faster as its capex gets commissioned and it begins to export its products. An improvement in margins may result in even faster growth in net profit. The gains will be visible partly in FY09 and fully in FY10.

The earnings per share (EPS) for FY09 and FY10 are estimated at Rs 21 and Rs 32, respectively. At its current price, the forward P/E multiples work out to 2.9x and 2x for FY09 and FY10, respectively. The forward EV/EBITDA multiples for FY09 and FY10 are estimated at 3.2x and 1.7x, respectively. The stock has attractive upside potential for investors at the current level.