Jamna Auto Industries is a play on multi-year CV cycle; further re-rating potential: Nirmal Bang

We initiate coverage on Jamna Auto Industries (JAI) with a Buy rating and a target price (TP) of Rs106. We have assigned 22x FY23E EPS, as we expect it to report a strong 49% earnings CAGR over FY21-FY24E, driven by: (1) A multi-year upcycle in the domestic Commercial Vehicles (CV) industry, which will directly benefit JAI due to its leadership position in the OEM market (2) Rising share of value-added products due to a structural shift from conventional springs to parabolic springs amid continued modernization (3) Opportunity to increase content per vehicle on the back of new launches (4) Focused efforts to increase the share of the replacement market to further diversify its sales mix. JAI, the largest leaf spring manufacturer in India, is an ideal play on the ongoing upturn in the CV cycle given its ~68% domestic OEM market share. Higher operating leverage going forward (as the utilization level accelerates) and an improved product mix (driven by value-added products & aftermarket revenues) will result in ~290bps margin expansion, driving a strong earnings growth over FY21-24E. We expect limited capex and strong FCF generation over the next 2-3 years. JAI has turned net debt free in FY21. Strong margin expansion and higher asset turns will be the key drivers of improvement in RoE/RoCE, which we expect to reach 31%/40% by FY24E. We assign Buy rating on JAI with a TP of Rs106 (22x FY23E EPS), with an upside of 22% from CMP.

Key beneficiary of a multi-year CV upcycle: We see strong multi-year CV upcycle over the next 2-3 years, driven by (1) a significantly low base (MHCV sales have fallen to FY04 levels) (2) government’s thrust on infrastructure development and (3) strong pick-up in replacement demand on implementation of the scrappage policy. We note that the CV industry will see recovery from 2HFY22 post going through a tough phase over the last two years due to change in axles load norms, sluggish economic environment and Covid-19. We believe that JAI is well placed to reap the benefits of strong CV demand going forward due to its dominant position in the OEM market. We also note that tonnage growth usually outperforms volume growth during CV upcycle, which will drive higher content per vehicle and demand for value-added products like parabolic springs and lift axles. Over the past few years, JAI has outperformed the MHCV industry growth rate on the back of higher content per vehicle and value-added products.

Rising content and share of high-margin products to drive growth: Steady modernization in trucks is driving shift from conventional springs to more profitable parabolic springs (share of parabolic spring rose to ~27% in FY21 vs. 17% in FY15). Its products like lift axles and air suspensions, which are used more widely in western countries, are finding gradual acceptance in India as well, which augurs well for JAI. Apart from these products, JAI has planned launch of machining products in 2HFY22. Though this business will start small initially (rise in content/vehicle by Rs10k), we note that the opportunity size from these products remains large given that more than one ton of casting products go into making a truck. JAI is also planning to launch spring and axles allied components for the OEM market in FY23.

Focus on non-cyclical aftermarket: JAI’s market share in the replacement market stands at ~15%. The aftermarket segment is dominated by unorganized players and our interactions with dealers suggest that the price gap between JAI and the unorganized players still remains ~15-20% as against earlier expectation of reduction post GST. To increase traction in the aftermarket, JAI has taken various initiatives like (1) expanding its distribution network (2) increased number of products (3) reduced lead time for supplies and digitalization, leading to better efficiency. These initiatives have already started yielding results (significantly better performance of aftermarket segment resulting in improvement in revenue share to ~28% in FY21).

Valuation: JAI’s stock price has outperformed the broader indices over the past few months on the back of expectations of strong volume and earnings growth as the CV cycle picks up. The stock currently trades at ~18x FY23E EPS (avg PE ~19x). We expect the company to report strong 49% PAT CAGR over FY21-FY24E, led by ~30% sales CAGR and ~290bps margin expansion. We believe that the company deserves to trade at a premium given its leadership position and strong earnings outlook. We initiate coverage on JAI with a BUY rating and a TP of Rs106, based on 22x FY23E EPS