Sandhar Technologies Initiating Coverage Research Report By Karvy

Diversified Auto Ancillary at attractive Valuations

Sandhar Technologies Ltd (Sandhar) is a multi-product auto component supplier based out of Gurgaon. It is a dominant Auto lock assemblies and Rear View Mirror manufacturer in India. It has strong relationship with OEMs like Hero Motocorp, TVS Motor, Royal Enfield and Honda Cars.

Sandhar’s 2W business (locks, mirrors & wheels – 55% of sales) is on a strong footing:

Sandhar enjoys dominant share in locks and mirrors with 2W OEM’s. Currently it has 100% share of business with Hero Motocorp, TVS Motors and Royal Enfield (~54% of 2W industry). We anticipate Sandhar’s 2W segment to grow in double digits over the next 2-3 years on account of (a) overall 2W industry growth in India due to increasing youth population and rural recovery b) Its shift towards introducing premium products (Smart locks, ORVM mirrors etc ) resulting in increase in content per vehicle and c) its recent entry in scooter segment (TVS Jupiter).

4W and Cabin Fabrication Business (~20% of sales) is on up cycle:

Sandhar has been supplying auto components to Honda Cars since last 20 years. Over the last 4 years its content per vehicle in Honda cars has grown from 8K to 12K. Honda’s plan to introduce 6 new models and increasing its market share from 5% to 10% in India over the next 3-4 years augurs well for Sandhar. Sandhar has set-up a new facility in Jaipur for supplies of fabrication parts (operator cabin and fabrication components) across JCB’s products line. It expects its cabin revenues to double to ~Rs4 bn in two years with new facility addition.

New plants to be operational:

Currently Sandhar has 34 manufacturing units and it is in process of commissioning 5 more plants in CY18. Out of ~5bn capex incurred by it over the last 4 years, Rs2.5bn capex is yet to start generating sales for the company (sales potential of ~Rs6bn). We estimate 18.7% sales CAGR for Sandhar over FY18-20.

PAT margins to expand from 3.5 to 5.8% – Profit to double over FY18-20:

We estimate Sandhar’s PAT margins to expand from 3.5 % to 5.8% over FY18-20E on account of a) 70bps EBITDA margin expansion (operating leverage and increasing contribution of higher profitable business) and b) Interest cost saving on account of debt repayment out of IPO proceeds. The company is expected to report earnings CAGR of 52.2% over FY18-20E resulting in profits doubling over the same period.

Attractive Valuations – BUY:

Sandhar is among the top five diversified auto ancillary listed entities in India. It has exhibited steady and consistent operating history. We believe, Sandhar has now entered into a high growth phase wherein its sales and PAT are expected to grow at 18.7% and 52.2% over FY18-20E respectively.

Further we believe, JVs will enable sustenance of growth beyond FY20E. We initiate coverage on Sandhar with a BUY rating and target price of Rs474 (PER of 18xFY20E earnings – ~20% average discount to peers) on the back of 20% ROE and debt free credentials.