AngelBrokingResearch SetcoAutomotive 4QFY2015RU

4QFY2015 Result Update | Auto Ancillary
May 28, 2015
Setco Automotive
BUY
Performance Highlights
CMP
Target Price
Quarterly highlights (Standalone)

Y/E March (` cr)
Net Sales
EBITDA
EBITDA margin (%)
Adj. PAT
4QFY15
130
13
9.7
3
4QFY14
109
10
8.8
1
`233
`286
Investment Period
% chg (yoy)
19.1
31.5
90 bp
162.8
3QFY15
113
16
14.3
6
% chg (qoq)
14.8
(22.0)
(460 bp)
(51.2)
Source: Company, Angel Research
12 Months
Stock Info
Auto Ancillary
Sector
Market Cap (` cr)
627
Net Debt (` cr)
282
Standalone results miss estimates on lower top-line growth and margins;

Consolidated numbers for FY2015 broadly in line on loss reduction in
subsidiaries: Setco Automotive (SAL)s 4QFY2015 standalone revenues grew 19%
yoy to `130cr, led by double-digit growth in both the OEM and the aftermarket
space, but were lower than our expectation of `140cr. Operating margins at
9.7% missed our estimates of 13.9%. Increase in raw material expenses due to
higher inventory (inventories costs are higher in 4Q given the typically high
volume of OEM sales) led to lower than anticipated margins. On yoy basis, the
margins improved 90 bp. Given the miss on the operating front, the net profit at
`3cr, was lower than our estimate of `7cr. However given the reduction in losses
of subsidiaries due to cost control measures (subsidiaries losses came down from
`5 cr in FY2014 to `2.9 cr in FY2015), SAL consolidated FY2015 Net profit at
`21 cr was broadly in line with our estimate of `23 cr.
Beta
Outlook and valuation: The medium & heavy commercial vehicle (MHCV) industry
is poised for a double-digit growth over the next two years (we expect 17% CAGR)
on account of better economic outlook, improvement in fleet operators
profitability due to pick up in freight, and reduction in fuel cost due to decline in
diesel prices. Also, SAL would benefit from growth in the clutch replacement
industry with it having set up independent networks to tap the growth. The
margins are also estimated to improve by 200bp over the FY2015-2017 period
due to operating leverage, better product mix, and consumption of captive
castings. We estimate SALs top-line and bottom-line to grow at 22% and 57%
CAGR over the next two years. We have retained our earnings assumptions and
reiterate our Buy rating on the stock with a price target of `286 (based on 15x
FY2017 earnings).
FII / NRIs / OCBs
16.3
Indian Public / Others
15.6
0.7
52 Week High / Low
294/97
Avg. Daily Volume
13,049
10
Face Value (`)
27,507
BSE Sensex
8,319
Nifty
SETC.BO
Reuters Code
SETC@IN
Bloomberg Code
Shareholding Pattern (%)

62.9
Promoters
5.2
MF / Banks / Indian Fls
Abs. (%)
3m
1yr
3yr
Sensex
(6.3)
12.0
67.6
Setco
(3.5) 109.0
58.1
3-year price chart

300
250
200
150
100
50
Apr-15
Nov-14
0
Jun-14
FY2017E
781
17.8
51
57.3
14.3
19.0
12.2
2.3
18.9
16.3
1.0
6.6
Jan-14
FY2016E
663
26.4
32
56.7
13.2
12.1
19.3
2.8
14.3
13.4
1.1
8.3
Aug-13
FY2015
524
34.4
21
95.2
12.2
7.7
30.2
3.1
10.2
10.2
1.3
10.8
Mar-13
FY2014
390
(2.4)
11
(59.6)
9.7
4.0
58.9
3.3
5.6
9.0
1.5
15.5
Oct-12
Y/E March (` cr)

Net Sales
% chg
Net Profit
% chg
EBITDA (%)
EPS (`)
P/E (x)
P/BV (x)
RoE (%)
RoCE (%)
EV/Sales (x)
EV/EBITDA (x)
May-12
Key financials
Bharat Gianani
022-3935 7800 Ext: 6817
[email protected]
Please refer to important disclosures at the end of this report
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Setco Automotive | 4QFY2015 Result Update
Exhibit 1: Quarterly financial performance (Standalone)

Y/E March (` cr)
4QFY15
4QFY14
% chg (yoy)
3QFY15
% chg (qoq)
FY15
FY14
% chg (yoy)
130
109
19.1
113
14.8
524
390
34.4
12.9
63
26.2
33.8
Net Sales
Consumption of RM
79
70
60.8
64.1
Staff Costs
11
(% of Sales)
8.6
6.5
Other Expenses
27
23
(% of Sales)
20.9
20.6
Total Expenditure
118
100
17.9
97
20.9
Operating Profit
13
10
31.5
16
(22.0)
OPM (%)
9.7
8.8
9.2
(7.1)
15.8
(4.2)
(% of Sales)
Interest
55.3
56.6
10
25
219
56.1
60
52
11.4
13.4
108
81
20.6
20.8
460
352
30.7
64
38
69.2
12.2
9.7
26
23
12.6
16
14
17.0
26
10
14.2
8.7
20.8
293
55.8
10.1
21.8
14.3
Depreciation
Other Income
Reported PBT
2.9
0.7
7.0
5.0
2.6
(% of Sales)
Provision for Taxation
(% of PBT)
2
386.1
(51.8)
14.8
32.6
155.6
22.7
(43.0)
23.5
21.0
(3.5)
Extraordinary item
Reported PAT
(66.2)
21
18
13.1
162.8
21
11
95.2
2.3
1.0
3.9
2.7
Adj PAT
Adj. PATM
Equity capital (cr)
Reported EPS (`)
(51.2)
(51.2)
5.4
1.1
0.4
2.3
7.7
4.0
Exhibit 2: 4QFY2015 Actual vs Angel estimates

Y/E March (` cr)
Net Sales
Actual
Estimates
Variation (%)
130
140
(7.0)
EBITDA
13
19
(34.9)
EBITDA margin (%)
9.7
13.9
(420 bp)
(60.0)
Adj. PAT
May 28, 2015
4QFY2015 was the third consecutive quarter where the MHCV segment
posted a double-digit growth. During the quarter, the segment reported a
growth of 26% yoy. Improvement in economic growth and fleet operators
profitability led to a sharp improvement in MHCV volumes.
Improvement in the MHCV OEM segment coupled with increased replacement

demand (due to improvement in industry volumes coupled with the company
tapping the replacement market through independent network) led to strong
double digit growth in revenues. SALs revenues grew by 19% yoy during
4QFY2015.

Exhibit 3: MHCV industry in growth phase
Exhibit 4: Revenues maintain double digit growth
20
50,000
10
80
30
40,000
60
20
30,000
(10)
20,000
(20)
10,000
(30)
20
(10)
(40)
(20)
MHCV Industry (units)
50
100
40
10
40
Revenues (` cr)
% growth
4QFY15
3QFY15
2QFY15
1QFY15
4QFY14
3QFY14
2QFY14
1QFY14
4QFY15
3QFY15
60,000
2QFY15
30
1QFY15
60
70,000
120
4QFY14
70
40
3QFY14
140
80,000
2QFY14
50
1QFY14
90,000
% growth
The EBIDTA margin for the quarter, at 9.7%, improved 90bp yoy but was
lower than our estimate. Increased inventories pushed up the raw material
costs, thereby impacting the margins.
Lower than anticipated operating performance impacted profitability. The net

profit at `3cr, missed our estimate of `7cr.
Exhibit 5: EBITDA margin improves yoy
Exhibit 6: Net profit grows on low corresponding base
18
16
12
10
15
14
10
12
12
6
10
EBIDTA (` cr)
May 28, 2015
Margin (%)
Adj PAT (` cr)
4QFY15
3QFY15
2QFY15
1QFY15
4QFY14
3QFY14
2QFY14
1QFY14
4QFY15
3QFY15
2QFY15
6
1QFY15
0
4QFY14
3QFY14
2QFY14
1QFY14
Margin (%)

Investment arguments
Direct beneficiary of MHCV upcycle: After two consecutive years

(FY2013 and FY2014) of a steep double-digit decline, the MHCV segment is
on course for a cyclical upturn. The uptrend is clearly visible with the segment
reporting a growth of 16% in FY2015. We believe the MHCV segment is well
poised to maintain the double-digit growth over the FY2015-FY2017 period
due to a) Better economic outlook which is likely to generate freight revenues,
b) Firming of freight rates and improvement in fleet operators profitability, c)
Expected reduction in interest rates which would revive the investment cycle,
and d) Budgetary focus to increase road network which would enhance usage of
commercial vehicle (CV)s. SAL would be the direct beneficiary of uptick in MHCV
OEM demand as it commands 85% market share, drawing about 30% of its
total revenues from the space.
Aftermarket and export focus to be growth drivers: Improved

fleet utilization due to higher freight availability is likely to propel the
replacement demand for clutches. SAL previously used to cater to the
replacement market only through the OEM authorized distribution channels.
However, SAL is now teaming up with multi branded distributors (network
partners other than the OEM authorised outlets) to independently tap the
replacement market. These distribution channels provide huge opportunity as
SAL can effectively tap the third and fourth replacement cycle for clutches
which are typically done outside the OEM authorized dealerships. We expect
SAL aftermarket segment to post a CAGR of ~15% over the next two years.
Also, SAL is negotiating with American and European OEMs to commence
supplies to their authorized aftermarket channels. SAL is already supplying to
these OEMs in India and is now aiming to initiate supplies to their overseas
arms. We expect exports (contributing about 9% of the revenues) to register a
healthy 25% CAGR over FY2015-FY2017.
Outlook and valuation

The MHCV industry is poised for a double-digit growth over the next two years (we
expect 17% CAGR) on account of better economic outlook, improvement in fleet
operators profitability due to pick up in freight and reduction in fuel cost (owing to
reduction in diesel prices). Also SAL would benefit from the growth in the clutch
replacement industry with it setting up independent networks to tap the growth. The
margins are also estimated to improve by 200bp over the FY2015-2017 period
due to operating leverage, better product mix and consumption of captive castings.
We estimate SALs top-line and bottom-line to grow at 22% and 57% CAGR over
the next two years. We have retained our earnings assumptions and reiterate Buy
rating on the stock with a price target of `286 (based on 15x FY2017 earnings).
May 28, 2015

Company background
Setco Automotive Ltd (SAL) is the largest manufacturer of clutches for commercial
vehicles. The company has a market share of 85% in the MHCV OEM segment,
supplying to majors like Tata Motors, Ashok Leyland, Volvo-Eicher, Bharat Benz,
Asia Motor Works and Mahindra & Mahindra. In the MHCV replacement segment,
SAL has a market share of about 65%. SALs products are sold under the Lipe
brand. It has four manufacturing facilities; two in India (Gujarat and Uttarakhand)
and one each in the US and the UK. Apart from commercial vehicles, SAL also
manufactures clutches for hydraulic products used in the construction equipment
industry and precision engineering components.
The replacement segment is the largest contributing segment accounting for about
62% of the overall revenues. Aftermarket sales through the OEM channel contribute
53% of the revenue while sales through the independent route contribute 9%. OEM
sales form 30% of the overall revenues while exports account for 9%.
May 28, 2015

Profit and loss statement

Y/E March (` cr)
FY2016E
FY2017E
Total operating income
423
399
390
524
663
781
% chg
19.9
(5.6)
(2.4)
34.4
26.4
17.8
Total expenditure
348
343
352
460
575
669
Net raw material costs
241
222
219
293
365
423
Employee expenses
40
46
52
60
72
84
Other
66
74
81
108
138
161
EBITDA
75
57
38
64
88
112
% chg
16.0
(24.7)
(33.4)
69.2
37.3
27.7
(% of total op. income)
17.8
14.2
9.7
12.2
13.2
14.3
Depreciation & amortization
11
12
14
16
18
19
EBIT
68
49
34
52
75
100
% chg
20.0
(27.3)
(31.8)
56.1
42.9
33.3
16.0
12.3
8.6
10.0
11.3
12.8
19
20
23
26
34
36
Interest and other charges

Other income
Recurring PBT
49
29
10
26
41
64
% chg
11.0
(39.8)
(65.4)
155.6
56.8
57.3
Extraordinary items
(3)
PBT (reported)
46
29
18
26
41
64
Tax
14
(% of PBT)
1.3
11.2
(3.5)
21.0
21.0
21.0
PAT (reported)
45
26
18
21
32
51
ADJ. PAT
48
26
11
21
32
51
44.0
(45.9)
(59.6)
95.2
56.7
57.3
% chg
May 28, 2015
FY2012 FY2013 FY2014 FY2015
11.4
6.5
2.7
3.9
4.9
6.5
Basic EPS (`)
25.8
9.8
6.8
7.7
12.1
19.0
Adj. EPS (`)
27.4
9.8
4.0
7.7
12.1
19.0
% chg
44.0
(64.2)
(59.6)
95.0
56.7
57.3

Balance sheet statement

Y/E March (` cr)
FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E
SOURCES OF FUNDS
Equity share capital
18
27
27
27
27
27
Reserves & surplus
115
155
163
175
199
242
Shareholders Funds
133
182
189
202
226
268
Total loans
142
173
178
305
325
335
Deferred tax liability

Long term provisions
282
362
375
515
559
611
154
202
230
355
395
425
52
65
80
96
114
133
103
137
150
259
281
292
Capital work-in-progress
12
14
Investments
22
37
51
50
50
50
Total Liabilities
APPLICATION OF FUNDS
Gross block
Less: Acc. depreciation
Net Block
Long term loans and adv.

Current assets
Cash
Loans & advances
Other
Current liabilities
May 28, 2015
12
19
25
24
30
35
207
214
216
273
317
375
23
21
20
21
29
36
43
177
191
189
221
275
330
74
59
75
98
128
148
Net current assets
133
155
141
174
190
226
Total Assets
282
362
375
515
559
611

Cash flow statement

Y/E March (` cr)
Profit before tax
Depreciation
Change in working capital
Others
46
29
18
26
41
64
16
13
15
16
18
19
(39)
(28)
17
(15)
(33)
(41)
(0)
Direct taxes paid
(1)
(3)
(5)
(9)
(14)
Cash Flow from Operations
24
13
51
21
17
29
(Inc.)/Dec. in fixed assets
(32)
(49)
(22)
(125)
(40)
(30)
(Inc.)/Dec. in investments
(13)
(15)
(15)
(7)
(7)
(6)
(6)
(5)
(52)
(72)
(43)
(122)
(46)
(35)
Inc./(Dec.) in loans
38
31
127
20
10
Dividend paid (Incl. Tax)
(8)
(8)
(8)
(8)
(8)
(8)
22
(2)
Other income
Cash Flow from Investing
Issue of equity
Others
Cash Flow from Financing
May 28, 2015
34
53
(5)
119
12
Inc./(Dec.) in cash
(6)
18
(17)
(4)
Opening Cash balances
23
Closing Cash balances
23

Key ratios
Y/E March
Valuation Ratio (x)

P/E (on FDEPS)
8.5
23.8
58.9
30.2
19.3
12.2
P/CEPS
7.0
16.2
25.7
17.0
12.4
8.9
P/BV
3.1
3.4
3.3
3.1
2.8
2.3
Dividend yield (%)
1.7
1.1
1.1
1.2
1.9
3.1
EV/Sales
1.3
1.5
1.5
1.3
1.1
1.0
EV/EBITDA
7.2
10.3
15.5
10.8
8.3
6.6
EV/ Total Assets
1.9
1.6
1.6
1.3
1.3
1.2
EPS (Basic)
27.4
9.8
4.0
7.7
12.1
19.0
EPS (fully diluted)
27.4
9.8
4.0
7.7
12.1
19.0
Cash EPS
33.5
14.4
9.1
13.7
18.8
26.2
4.0
2.7
2.7
2.9
4.5
7.1
75.5
68.2
71.0
75.6
84.6
100.5
16.0
12.3
8.6
10.0
11.3
12.8
Tax retention ratio
1.0
0.9
1.0
0.8
0.8
0.8
Asset turnover (x)
1.5
1.1
1.1
1.1
1.2
1.3
ROIC (Post-tax)
24.5
12.2
9.4
8.4
10.7
12.9
Cost of Debt (Post Tax)
13.0
10.2
13.6
6.8
8.3
8.4
1.0
0.9
0.9
1.4
1.4
1.2
35.9
14.0
5.6
10.7
14.1
18.6
24.0
13.6
9.0
10.2
13.4
16.3
Angel ROIC (Pre-tax)
24.8
13.7
9.1
10.7
13.5
16.4
ROE
36.3
14.4
5.6
10.2
14.3
18.9
2.7
2.0
1.7
1.5
1.7
1.8
Inventory / Sales (days)
76.7
101.5
111.7
91.5
89.6
92.4
Receivables (days)
76.4
72.6
65.4
62.0
62.0
62.0
Payables (days)
63.5
53.7
70.1
68.5
70.3
69.4
107.4
139.1
126.9
105.1
101.3
105.1
1.0
0.9
0.9
1.4
1.4
1.2
Net debt to EBITDA
1.8
3.0
4.6
4.4
3.6
3.0
Interest Coverage (EBIT / Int.)
3.6
2.5
1.4
2.0
2.2
2.8
Per Share Data (`)
DPS
Book Value
Dupont Analysis
EBIT margin
Leverage (x)
Operating ROE
Returns (%)
ROCE (Pre-tax)
Turnover ratios (x)

Asset Turnover (Gross Block)
WC cycle (ex-cash) (days)

Solvency ratios (x)
Net debt to equity
May 28, 2015

Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
DISCLAIMER
Angel Broking Private Limited (hereinafter referred to as Angel) is a registered Member of National Stock Exchange of India Limited,
Bombay Stock Exchange Limited and MCX Stock Exchange Limited. It is also registered as a Depository Participant with CDSL and
Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Private Limited is a
registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number
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/dealing in securities Market. Angel or its associates including its relatives/analyst do not hold any financial interest/beneficial
ownership of more than 1% in the company covered by Analyst. Angel or its associates/analyst has not received any compensation /
managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. Angel/analyst
has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity
of the company covered by Analyst.
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment
decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should
make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the
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Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and
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latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may
have investment positions in the stocks recommended in this report.
Disclosure of Interest Statement
Subros
1. Analyst ownership of the stock
No
2. Angel and its Group companies ownership of the stock
No
3. Angel and its Group companies' Directors ownership of the stock
No
4. Broking relationship with company covered
No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
Ratings (Based on expected returns

over 12 months investment period):
May 28, 2015
Buy (> 15%)
Accumulate (5% to 15%)

Reduce (-5% to -15%)
Neutral (-5 to 5%)

Sell (< -15%)

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4QFY2015 Result Update | Auto Ancillary

May 28, 2015

Quarterly highlights (Standalone)

Source: Company, Angel Research

Net Debt (` cr)

Standalone results miss estimates on lower top-line growth and margins;

FII / NRIs / OCBs

Indian Public / Others

52 Week High / Low

Avg. Daily Volume

Face Value (`)

Shareholding Pattern (%)

MF / Banks / Indian Fls

3-year price chart

Source: Company, Angel Research

Y/E March (` cr)

Source: Company, Angel Research

Please refer to important disclosures at the end of this report

EMISPDF in-ozonecap from 49.248.41.203 on 2016-11-07 07:52:27 GMT. DownloadPDF.

Setco Automotive | 4QFY2015 Result Update

Exhibit 1: Quarterly financial performance (Standalone)

Source: Company, Angel Research

Exhibit 2: 4QFY2015 Actual vs Angel estimates

EBITDA margin (%)

May 28, 2015

Improvement in the MHCV OEM segment coupled with increased replacement

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Setco Automotive | 4QFY2015 Result Update

Exhibit 3: MHCV industry in growth phase

Exhibit 4: Revenues maintain double digit growth

MHCV Industry (units)

Source: Company, Angel Research

Source: Company, Angel Research

Lower than anticipated operating performance impacted profitability. The net

Exhibit 5: EBITDA margin improves yoy

Exhibit 6: Net profit grows on low corresponding base

Source: Company, Angel Research

May 28, 2015

Adj PAT (` cr)

Source: Company, Angel Research

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Setco Automotive | 4QFY2015 Result Update

Direct beneficiary of MHCV upcycle: After two consecutive years

Aftermarket and export focus to be growth drivers: Improved

Outlook and valuation

May 28, 2015

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Setco Automotive | 4QFY2015 Result Update

May 28, 2015

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Setco Automotive | 4QFY2015 Result Update

Profit and loss statement

Total operating income

Net raw material costs

(% of total op. income)

Depreciation & amortization

(% of total op. income)

Interest and other charges

May 28, 2015