Sterling Tools Research Report By Motilal Oswal

We recommend to BUY Sterling Tools Limited (STL) for a target of INR 1,207 – 20x on FY18E EPS (+32% Upside).

One of the largest fastener manufacturers in India:

Sterling Tools is one of the largest manufacturer of fasteners in India, with a market share of ~28%. The company is supplier of high tensile (HT) fasteners to Honda Motorcycle Scooter India Private Limited (HMSI) and Maruti Suzuki India Limited (MSIL). In top line 2-wheeler accounts for 25% , passenger vehicles (~15%), commercial vehicles (~25%), and farm equipment (~7%-8%) of total sales. STL’s other customers include Tata Motors, Ashok Leyland, Daimler, FIAT, Hero Motocorp, Mahindra & Mahindra, Volvo, Eicher, TAFE and General Motors. Sales to OEM form ~85%, after market ~8% and exports constitutes ~7% of total revenue. STL has a capacity of 45,000 MT spread across three plants currently running at 70-75% utilisation. The company has started work on the phase-I expansion for a new plant in Gujarat. Total capex for the project will be INR 50cr likely to be commissioned by September 2017.

Triggers in place for an uptick in automobiles sales:

Good monsoons and 7th pay commission have accelerated the volume growth for the leading automobile companies across segments. STL’s major principal’s Maruti Suzuki and HMSI reported 13.5% YoY and 23.5% YoY volume growth respectively for 3 month period Aug-Oct 2016. Passenger vehicles, 2 wheelers, commercial vehicles or tractors all are poised to post strong volume growth in FY17. STL’s strong market positioning in automobile fastener segment having sizeable market share in OEMs lends heft to its growth prospects for foreseeable future.

Strong financials:

The company delivered a CAGR of 10% in revenues during FY13-16; during the same period PAT delivered a CAGR of 43% aided by improving margins and cash flows. Strong focus on costs and tight control over working capital has yielded desired operating efficiencies for the company. Sound balance sheet management has led to sharp improvement in return ratios over the years. [ROE 11% in FY13 to 23% in FY16, ROCE:15% in FY13 to 24% in FY16].

Valuations & View:

Conducive macro factors like good monsoons, 7th pay commission roll out, passage of GST, increasing localization by OEMs will propel STL on growth path going forward. We expect earnings growth of 20% over FY16-18E. STL trades at 15.1x FY18E EPS of INR 60.3. We initiate coverage on the stock with a ‘BUY’. We value the company at 20x FY 18E EPS with a target price INR 1,207, giving an upside of 32%.