Steel Strips Wheels Limited – Attractive Valuations

SSWL for the past 2 year has been battling on 2 fronts –

1. Exports – Spike in 2021 was met with a 70% drawdown in 2022 owing to interest rate hiking, overstocking and normalisation of supply chains in west. All of that has been absorbed and SSWL is back on track to match it in FY24 and surpass in FY25.

2. Capacity –

i. Alloy capacity was fully utilised leading to a halt on revenue growth on Alloys as demand outstripped capacity (Order book full till 2026). Company had commenced Alloy capex in 2022 and now in Aug ’23 it’s going to commercialize and ramp up.

ii. Steel capacity is operating at 70% utilization and AMW acq. is going to bring more capacity.

Both of these factors had led to muted growth in 22-23 as exports revenue declined (830 cr → 300 cr) but was compensated by domestic revenue increase.

3 trigger that should materialize soon –

1. AMW acquisition.
2. Alloy capacity commercialization.
3. New client win (as per Q1FY24 concall it’s a top OEM)

Optionalities available – 2W EV motor controller biz and New import substitution product launch.

EBITDA Margin has been tricky as it has ranged between 11-12% while it should’ve been higher as Alloy and exports both have higher margin (15%+) and they together make up 30% of revenues. Management has argued that its due to increase in R&D employee cost (60 employees) + ESOP and other factors. I expect margins to expand to 12-13% slowly on account of increasing Alloy share and cost rationalisation (Automation, operating leverage etc)

Overall the management is ambitious with aim of becoming the lowest cost wheels manufacturer in the world with good quality wheels. They aim to reach 10 million alloy wheels capacity in next 4-5 years (Currently at 3m, expanding to 4.8m in August).

Management has undertaken steps to improve ROE/ROCE by focusing on taking only good margin biz (recently they have let go of a 4-5% margin biz which had led to a revenue hit). Also focusing on cost rationalisation and company’s capital structure (paying down debt, automation, entering higher margin biz)

At the end of day, SSWL is a commodity converter with some tech involved but it has been able to scale its capacity and revenues while maintaing quality and margins with top OEMs in its clientele to have 50% market share in domestic steel wheels.