Precision Camshafts

Supplying to global car manufacturers

Ford and General Motors are its largest customers contributing to over 32% (each) of its revenues

CM RATING

42/100

Promoted by Yatin Shah and Dr Suhasini Shah in 1992, Precision Camshafts (PCL) is one of the India¡¯s leading manufacturers of camshafts for global markets. Camshafts is a critical engine component used in the passenger vehicle segment. PCL mainly caters to the chilled iron cast camshafts segment and has only recently forayed into chilled ductile iron and assembled camshafts castings, the two other ways of manufacturing camshafts globally. The company manufactures and supplies over 150 varieties of camshafts for passenger vehicles, tractors, light commercial vehicles and locomotive engine applications. It generates 70% revenue from camshafts casting and 30% from high value added machined products.

The company has more than 8% market share in the global passenger vehicle camshafts segment. It has long standing relationships with clients. Ford and General Motors are its largest customers contributing to over 32% (each) of its revenues. Exports to Europe constitute more than 40% of its revenues.

PCL has two state-of-the-art manufacturing facilities ¨C an EOU unit and a domestic unit ¨C both situated at Solapur, Maharashtra. The EOU unit consists of four foundries and two machine shops and products manufactured at the EOU unit are primarily exported to overseas customers. The domestic unit consists of 1 foundry and 1 machine shop which cater to the domestic market.

The total manufacturing capacity as on September 30, 2015 was 13.38 million camshaft castings p.a. from the foundries and 2.22 million machined camshafts p.a from the machine shops.

The company entered the Chinese market in 2013 through a joint venture (JV) with Ningho Shenglong to cater to its key client. The company has recently entered into a technological tie-up with EMAG group of Europe to foray into assembled camshafts (which account for 30% of the total market).

The Offer and the Objects

The issue comprises public issue of Rs 240 crore with equity shares of 1.33 crore of face value of Rs 10 each at lower price band of Rs 180 per share and equity shares of 1.29 crore of face value of Rs 10 each at higher price band of Rs 186 per share. In addition to the above, there is an offer for sale of 0.91 crore of equity shares of Rs 10 each which comprises of about 0.61 crore of shares from promoter and promoter group and about 0.3 crore of shares from Jayesh Aradhye, an individual.

The minimum bid lot is 80 equity shares and in multiples of 80 equity shares thereafter. The issue is made through a book building process and will open on 27 January and will close on 29 January with anchor investor bidding date of 26 January 2016.

In addition to achieve the benefits of listing the equity shares on stock exchanges, enhance the visibility and brand image among existing and potential customers and provide liquidity to the existing shareholders, the company intends to utilize the proceeds of the public issue (Rs 240 crore) to establish a machine shop for ductile iron camshafts for Rs 200 crore, which will be operational in early FY 2018 and balance for general corporate purpose.

Strengths

The global market for PV camshafts is estimated to be about 100 mn units worth over Rs 7000 crore. The increase in outsourcing from automobile OEM (original equipment manufacturers), market share and share of machining components is helping the company to grow faster than the peers. The company has improved its market share in passenger vehicle camshafts market from 5-6% in 2010 to an estimated 8- 9% in FY 2014 and around 10% in FY 2015.

With lead time of more than three years, right from design till finalizing the camshafts, any change in a vendor entails significant switching costs for OEMs working as key entry barrier for new vendors in camshaft manufacturing or for acquiring new clients. The long-standing relationship of the company with key global OEMs such as Ford Motors, General Motors, and Hyundai among others, which contribute more than 75% of revenues, is helping the company to drive more business.

The company plans to add a two-million-unit capacity for machined camshafts with the proceeds of the IPO, which will be operational from FY 2018. The company has received firm orders from Ford for the sale from the new plant, which will thus drive higher earnings and margins for the company from FY 2018.

The global passenger vehicle camshaft market is divided amongst the three manufacturing processes, with chilled cast iron camshafts occupying a 35-40% share, and the remaining market being equally divided between ductile iron and assembled camshafts. By securing an order from Ford, PCL has ventured into manufacturing ductile iron camshafts and by agreement with EMAG, a German company, has also ventured into assembled camshafts. The foray into both these segments expands its addressable market size offering significant growth potential in the time to come.

Weaknesses

The company is over-dependant on Ford and General Motors, its largest customers contributing to over 32% (each) of its revenues. Any issue that can affect performance or image of Ford and General Motors can affect the company¡¯s performance and the scrip price significantly.

Further, the company caters only to the passenger car segment of the giant auto OEMs worldwide. Any slowdown in passenger car segment, due to global economic slowdown, can affect its prospects.

Currency depreciation and export incentives played a significant role in the margin improvement in the past years.

The OPM at 28.6% in the first half ended September 2015 seems virtually at its peak. There seems not much scope for margin improvements from here on.

Management compensation stands at 30% of FY 2015 PAT, which seems high.

Valuation

For FY 2015, the consolidated net sales grew by 14% to Rs 532.43 crore, OP was up by 14% to Rs 140.83 crore and PBT before EO was up by 3% to Rs 98.70 crore. There was an EO expense of Rs 61.49 crore in FY 2014 on account of provision for ESOP charges as compared with nil in FY 2015, resulting in PBT after EO going up 286%. Thus, PAT rose 475% to Rs 62.36 crore on a YoY basis. For the six months ended September 2015, revenues stood at Rs 253.37 crore and PAT stood at Rs 34.10 crore

At a price of Rs 186, the post issue diluted equity share capital of the company works to Rs 94.70 crore on face value of Rs 10 each. On this equity, the EPS for FY 2015 works out to Rs 6.6. The EPS for six months ended September 2015 on annualized basis works to Rs 7.2.

At the higher price band of Rs 186, and on an annualized EPS of Rs 7.2 for the six months ended September 2015, the scrip is offered at a P/E of 25.8 times. Among auto ancillaries, engine part manufacturers and large exporters do enjoy higher P/Es. However, concerns like over-dependence on two OEMs and prevailing uncertainty in global economy and markets are not adequately factored in the asking P/E.