Research Reports Of Six Companies With Strong Fundamentals

The Cabinet recently approved the Constitution Amendment Bill on Goods and Services Tax (GST), thereby paving way for the bill to be introduced in Parliament. In a major breakthrough, the Centre was able to keep petroleum and petroleum products under GST through states will be allowed to levy tax for the first few years. Subsequently, the entry tax was subsumed within GST while the Centre agreed to pay GST compensation for five years. With these contentious issues being ironed out, it is now anticipated that GST can be rolled out from April 1, 2016. With the introduction of GST it is expected that the goods movement as well as volume will increase manifold in the country. Concor with its countrywide network and footprints at all container ports including private is expected to be a major beneficiary of the same. Also, in FY15, container volume at all major ports has grown nearly 8% YoY on a YTD basis. Further, with the economic scenario expected to improve, Exim container volumes are anticipated to grow.

We hosted the management of Setco Automotive for a series of investor meetings. Setco is a leading supplier of MHCV clutches with 85% market share in the domestic market. The company’s strategy of setting up an independent aftermarket channel and backward integrating into ferrous castings products could act as strong earnings growth drivers over the next 2-3 years. Management has set an ambitious target of scaling revenues to Rs 10bn by FY17-18. Current valuations at 24.3x P/E on an LTM basis appear attractive, considering the company’s earnings are at near trough levels.

We hosted the management of Sundaram Clayton Ltd (SCL) for a series of investor meetings. SCL has a long standing track record of delivering high quality components to a reputed base of customers. SCL currently holds a 57.4% stake in TVS Motor, which is valued at Rs 67.3bn. While SCL’s earnings growth may accelerate with a cyclical demand upturn, its asset heavy business would restrict ROCE expansion beyond early double digits. Thus, valuation accorded to the core business is unlikely to scale above 10-12x forward earnings. Excluding the base business valuation (~15-20% of EV), implied holdco discount for its stake in TVS is significantly high at ~55-58%.

We hosted the management of Timken India for a series of investor meetings. Timken India is a high quality franchise with potential to deliver strong earnings growth and significantly expand return ratios on the back of its asset light business model. With over 200% returns in the past 12 months, valuations appear heady at 52.3x on LTM earnings. Nevertheless, with strong earnings momentum and latent opportunities to enter into new product segments, premium valuations seem justified.