Rico Auto Industries Ltd Research Report By Edelweiss

Long Term Recommendation: Rico Auto Industries Ltd

Renewed focus on clientele and product diversification to drive growth

Rico Auto Industries Ltd (RAIL) is a key manufacturer of ferrous and aluminium casting and machining components used in the automotive space.

RAIL manufactures over 400 components and is the sole supplier of these for the various models across leading automobile OEMs in the Indian and international markets.

Currently, BMW, Renault, Maruti Suzuki, Hero Moto Corp and Cummins are RAIL’s marquee clients. During FY15, the company fell on rough times, mainly due to the split of the Honda-Hero Group tie-up that impacted both top line and profitability.

Hence in the past few years, RAIL transformed from a two-wheeler (2W) component manufacturer into a diversified casting and machining component provider across different sectors.

It also underwent significant process restructuring that improved its profitability.

Diversifying product offerings, expanding clientele – Steps in the right direction

Over the past two fiscals, RAIL focussed on diversifying across segments in the automobile industry. Until 4-5 years ago, the Indian 2W industry supported little less than two third of company’s business and Hero Honda was its main customer.

However, the Hero and Honda split prompted RAIL to diversify its offerings and clientele. Currently, passenger vehicle (PV) OEMs, such as Renault, BMW and Maruti Suzuki, contribute ~55% to RAIL’s overall revenue.

Also, during the past few years, the company significantly increased its exports business, from 22% of its revenue in FY13 to ~28% in FY17.

Going forward, RAIL would continue its diversification into new products like aluminium and non-engine components that would place it on the right side of technology curve.

Adoption of lighter material in vehicle manufacturing to drive aluminium business

Many automobile OEMs have recently started increasing the aluminium content in their vehicles. This is mainly due to the introduction of stricter CO2 and fuel-efficiency norms in several countries over the past 2–3 years.

RAIL’s is focusing on developing structural aluminium parts complex in near future as a drive to scale up in value chain. RAIL’s aluminium business share in overall revenue has increased from 55-60% in FY13 to 71% in FY17.

Outlook, valuations: Healthy growth in order book, cost reduction to strengthen financial performance, valuation

Key drivers that could spur RAIL’s financial performance are: 1) Product diversification in the PV segment; 2) cost reduction measures; 3) plans to enter the high-realisation complex aluminium products business; 4) annual orders of more than INR 500 cr and bids for orders worth more than INR 700 cr, which ensure healthy growth.

We initiate coverage on the stock with a BUY recommendation and a target price (TP) of INR 140, based on 16x FY20E earnings. The stock currently trades at 19x, 15x and 10x of the FY18E, FY19E and FY20E earnings, respectively.