Rico Auto Industries Ltd – ROCE to grow + Auto Cycle revival?

I do apologise beforehand as this is not a super detailed DD. I

I found an interesting company by the name of Rico Autos and decided to write down my first thoughts out.

Rico Auto Industries Ltd.

Website BSE: 520008 NSE : RICOAUTO

Sector – Auto Ancillaries | Gruesome, Cyclical business.

Elevator Pitch – Slump in auto cycle, cheap valuations, depressed margins and ROCE which can turn up disproportionately.

Business Overview

• We manufacture and supply world class high precision and fully machined components & assemblies – both Aluminum and Ferrous – to leading OEMs across the Globe for Electric Vehicles, Electrified Vehicles and ICE Engines.
• Our multiple, flexible, fully integrated production facilities are equipped to offer a complete spectrum of services from Designing to Development of Tools, Casting and Precision Machining and Assembly of Components. Thus making us a Preferred Supplier to the EV & Hybrid Vehicle Market.
• Aluminum casting, Ferrous casting, Machine and assembly, Dies and molds, Engineering and R&D.
• The company began supplying EV businesses in 2019. Well poised to take advantage of the EV trend. From 2021 AR –
  
  
  

Variant Perception

• Currently the autos are in a downcycle, we might be poised for a cyclical uptick, with valuations cheap and market at a trough a clear upside can be capitalized upon.
• Eventual stabilization in RM prices, leading to better margins
• Margins should reach 11-12% a 400 bps point increase for about 3-5 quarters out from here.
• A revenue guidance, on a conservative basis of 2400 crores from 1860 crores from FY22.
• Valuations at a cyclical low as it trades with a market cap of 711 crores. Once margins hit 11-12%, a 0.5x P/S is not unreasonable.
• Currently business does a ROCE of 6%(Taking CE of Gross block + NWC) which can rise as per my estimates to 12% on the back of higher sales/capital employed and OPM.

Numbers

The 2nd is my rough estimate of where ROCE’s can head from here.
Business trades 0.3x P/S which I believe is undervalued.