On steady growth trajectory, re-rating imminent…
About the stock: Steel Strips Wheels Ltd. (SSWL), is a Chandigarh based company involved in designing and manufacturing of automotive wheels – both steel and alloy wheels. It currently has five plants in India with total production capacity of ~2.4 crore wheels per annum (including ~0.36 crore of alloy wheels)
• FY24 revenue mix: Alloy wheels: 28%; Steel wheels: 72%
• FY24 market share in steel wheels: PV: 37%; M&CV: 61%; Tractor: 42%
• SSWL counts all major domestic OEMs as its clients across categories
Investment Rationale:
• Capacity led expansion to propel topline growth: SSWL is a leading wheel manufacturer domestically and is a prominent player in domestic oligopolistic wheels industry. It is presently executing a brownfield expansion in the alloy wheel space which will augment its capacity from 36 lakh units per annum to 48 lakh units per annum with full ramp up of the same expected in 2-3 years’ timeframe. SSWL in the recent past has also acquired AACL from NCLT at an acquisition cost of ~₹ 138 crore, having steel wheel capacity of ~70 lakh units. Thus, total installed capacity at SSWL is expected to increase from ~2.4 crore units to ~3.2 crore units by FY25E. Going forward sensing steady demand prospects in the steel wheel segment, greater exports thrust and premiumisation play in alloy wheel space we have built in wheel sales volume CAGR of 7% over FY24- 26E. We have modelled in total wheel sales of 2.0 crore wheels in FY25E and 2.2 crore in FY26E. Also supporting topline growth at the company is venturing into new segments such as Aluminium knuckles. Management in the recent Concall also shared its vision for US$ 1 billion sales by FY30E.
• Capital efficient business model, declining debt to drive re-rating: SSWL is a capital efficient company realising ~11% EBITDA margins and ~14- 17% return ratios profile. On the debt side amidst brownfield expansion in alloy wheels, knuckles and AACL acquisition its current gross debt has increased to ~₹1,050 crore as of FY24 end. With peak capex behind us, debt is expected to retire at SSWL with gross debt expected at ~₹ 780 crore by FY26E. It presently trades inexpensive at <15x PE and <8x EV/EBITDA which makes re-rating imminent for the stock in our view. Rating and Target Price • We continue to retain our positive stance on SSWL and assign BUY rating on the stock amid organic growth on the anvil, levers for margin expansion and inexpensive valuations. Powertrain agnostic product profile is added positive. We built in sales/PAT growth of 8%/14% CAGR over FY24-26E. • We value SSWL at ₹ 330 i.e. 18x P/E on FY26E EPS of ₹ 18. IDirect SSWL Co Update Jul 24
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