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Setco Automotive Ltd.Setco Automotive Ltd.Setco Automotive Ltd.Setco Automotive Ltd.
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Setco Automotive (Setco) is a Vadodara based leading auto component company in India
The Company is
Top 3 M&HCV clutchTop 3 M&HCV clutchTop 3 M&HCV clutchTop 3 M&HCV clutchmanufacturers manufacturers manufacturers manufacturers
in the world by volumein the world by volumein the world by volumein the world by volume
Caters to ~85% Caters to ~85% Caters to ~85% Caters to ~85% of the OEM M&HCVof the OEM M&HCVof the OEM M&HCVof the OEM M&HCVDemand in IndiaDemand in IndiaDemand in IndiaDemand in India
CMP Rs. 135 Target Price Rs. 250CMP Rs. 135 Target Price Rs. 250CMP Rs. 135 Target Price Rs. 250CMP Rs. 135 Target Price Rs. 250
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� Expanding Product PortfolioExpanding Product PortfolioExpanding Product PortfolioExpanding Product Portfolio
Entry into LCV which is not adversely affected by economic slowdown & proposed foray into farm equipment sector
� Revival of CV IndustryRevival of CV IndustryRevival of CV IndustryRevival of CV Industry
The CV industry which was in downtrend for the last two years is expected to pick up from this year. Setco by being the market leader in the MHCV space will benefit from this
� Thrust on ExportsThrust on ExportsThrust on ExportsThrust on Exports
Currently Exports contribute 7-8% of sales and the company expects this to grow to 15% in the coming years. The Company has reached a breakthrough level where they will be able to push the new developments along with the diaphragm springs.
� New JVNew JVNew JVNew JV
Recently entered into a JV with Lingotes Especiales S.A and formed Lava Cast Pvt. Ltd. This will manufacture fully machined ferrous casting products and ensure steady and high quality supply for Setco
� Shareholder Shareholder Shareholder Shareholder FriendlyFriendlyFriendlyFriendly
Setco has always rewarded shareholders by way of regular Dividends and Bonus. It announced two bonuses in last 4 years. (1:1 in 2010 and 1:2 in 2012)
� Attractive Valuation: Attractive Valuation: Attractive Valuation: Attractive Valuation:
We are re-initiating coverage on Setco with a target price of Rs. 250, thus giving an upside potential of 85%. We expect the standalone EPS to go up from Rs. 8.7 in FY14 to Rs.10.5 in FY15 and Rs.16.8 in FY16. At the CMP of Rs.135, the stock is presently trading at 12.8x its FY15 and 8.0x its FY16 earnings
Investment Rationale
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Steady Steady Steady Steady Replacement Replacement Replacement Replacement demanddemanddemanddemand
MHCV clutches need to be changed every 2-2.5 years and this is a high margin business.
Recent foray into Independent After Market (IAM) with 40 distributors pan India is likely to boost sales in the unorganized aftermarket.
Investment Rationale
0000 1111 3333 5555 7777 9999 11111111 13131313YearsYearsYearsYears
Source: company
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Price Date Price Date Price Date Price Date 21/08/201421/08/201421/08/201421/08/2014 RsRsRsRs
Face Value 10
Market Price 130
Market Cap (Rs. Mn) 3,468
Equity Shares O/S (Mn) 26.7
Book Value (per share) 70.7
52 Week High/Low 147.3/ 61.9
All time High/Low 169.93/ 3.74
P/E Ratio (TTM) 19.02
PromoterPromoterPromoterPromoter
63.01%63.01%63.01%63.01%
FIIFIIFIIFII
16.32%16.32%16.32%16.32%
DIIDIIDIIDII
0.03%0.03%0.03%0.03%
OthersOthersOthersOthers
20.64%20.64%20.64%20.64%
Shareholding Shareholding Shareholding Shareholding PatternPatternPatternPattern
June 2014June 2014June 2014June 2014
We have included PE investment of New Vernon in FIIWe have included PE investment of New Vernon in FIIWe have included PE investment of New Vernon in FIIWe have included PE investment of New Vernon in FII
Market Information
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Setco TTM PE(x)
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�Among the top three M&HCV clutch manufacturers in the world by volume
It is the preferred supplier for clutches in India both by domestic & MNC players like Daimler and MAN
� Commands ~85% of the OEM M&HCV clutch market
~100% requirement of Tata Motors, Eicher Volvo & AMW~65% demand of Ashok Leyland
� Controls major share of the Organised Replacement Market through OES and Own Distribution networks
� Enjoys a strategic global presence and sells its clutches under , a world renowned brand
Business Overview
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OEMOEMOEMOEM
(29.8%)(29.8%)(29.8%)(29.8%)
OE After Sales OE After Sales OE After Sales OE After Sales
(OES)(OES)(OES)(OES)
(53.3%)(53.3%)(53.3%)(53.3%)
Independent Independent Independent Independent
After MarketAfter MarketAfter MarketAfter Market
(IAM) (IAM) (IAM) (IAM)
(8.5%)(8.5%)(8.5%)(8.5%)
ExportsExportsExportsExports
(8.4%)(8.4%)(8.4%)(8.4%)
Standalone Segmental Revenue (FY14)Standalone Segmental Revenue (FY14)Standalone Segmental Revenue (FY14)Standalone Segmental Revenue (FY14)
(Rs. Mn)
#IAM was started in H2FY14
OEM OEM OEM OEM
981981981981
OES OES OES OES
1,7511,7511,7511,751
IAM IAM IAM IAM
280280280280
Exports Exports Exports Exports
276276276276
Business Overview – Sales Breakup
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Global Clientele
9
Product
Range
Clutch Cover
Assembly
Push Type
Diaphragm
TypeCoil Type
Pull Type
Diaphragm
TypeCoil Type
Clutch Disc
Assembly
Organic Lining Ceramic Lining
� Only clutch manufacturer in the world to design & manufacture both coil spring & diaphragm spring both coil spring & diaphragm spring both coil spring & diaphragm spring both coil spring & diaphragm spring � Both types validated and approved by OEM vehicle manufacturers
Product Range
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17/430 SingleDiaphragm Spring
280 MM Single Diaphragm Spring
16/400 TwinDiaphragm Spring
395 Single PushDiaphragm Spring
Off-Highway, ConstructionHydraulics (Pressure Converters)
14/352 Single & TwinDirect Pressure Coil Spring
170 MM Single Diaphragm Spring
12/310 SingleDiaphragm Spring
13/330 SingleDirect Pressure Coil Spring
380 Single PushCoil Spring
15/380 Single & TwinDirect Pressure Coil Spring
Technical Capabilities
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SegmentsSegmentsSegmentsSegments 2010201020102010 2014201420142014 RemarksRemarksRemarksRemarks
Heavy CV Y Y Dominant Player
Medium CV Y Y Dominant Player
Light CV N Y Recent Entry
OEM Y Y Dominant Player
OES Y Y Dominant Player
IAM N Y Recent Entry
Farm Equipment Sector N N Proposed Entry
REMAN N N Plans for near future
Enhanced Product Offerings
12
Design & TechnologyDesign & TechnologyDesign & TechnologyDesign & Technology
(Updated with the latest (Updated with the latest (Updated with the latest (Updated with the latest
technological changes)technological changes)technological changes)technological changes)
Cost Cost Cost Cost
CompetitiveCompetitiveCompetitiveCompetitive
(Priced far (Priced far (Priced far (Priced far
lower than lower than lower than lower than
MNC players)MNC players)MNC players)MNC players)
Delivery & TimelinessDelivery & TimelinessDelivery & TimelinessDelivery & Timeliness
(preferred supplier of Top (preferred supplier of Top (preferred supplier of Top (preferred supplier of Top
OEMs)OEMs)OEMs)OEMs)
QualityQualityQualityQuality---- Latest Latest Latest Latest
CertificationsCertificationsCertificationsCertifications
((((ISO/TS 16949ISO/TS 16949ISO/TS 16949ISO/TS 16949
VDA VDA VDA VDA –––– 6.36.36.36.3
ISO 14001ISO 14001ISO 14001ISO 14001
OHSAS 18001OHSAS 18001OHSAS 18001OHSAS 18001)
Valeo,LuK,
Eaton,Sachs
Valeo,LuK,
Eaton,Sachs
Competitive Scenario
13
StrengthsStrengthsStrengthsStrengths
• Pre-Dominant player in MHCV clutches
• Well established Heritage “LIPE” brand
• State of the Art manufacturing facilities
• World Class R&D centers- India & UK
• Single source supplier to major OEMs in India
• Meets latest Quality, Safety & Environment Standards
OpportunitiesOpportunitiesOpportunitiesOpportunities
• Robust domestic demand
• Huge untapped market in IAM where it has recently entered
• International Markets hold tremendous growth potential
• Large market in LCV & farm equipment segment
ChallengesChallengesChallengesChallenges
• Stricter Environment regulations
• Reliable Supply Chain constrains
• Adhering to timelines of new projects
• Rising Input costs
Threats Threats Threats Threats
• Growing International competition
• Threat from unorganized market
• Delay in industry turnaround and slowdown fears
SCOT Analysis
14
Entry into
LCV Segment
Established a
state-of-the-art
R&D setup at
Kalol
Proposed
entry into
farm
equipment
segmentEntry into IAM.
Established 40
distributors pan
India
Entered into JV
with Spanish
Lingotes
Especiales S.A to
form a castings
foundry called
Lava Cast Pvt.
Ltd.
Backward
Integration-
Set up
Diaphragm
Spring Plant FY14
FY14
FY14
FY15
FY15FY15
In a recent (2013) study byAccenture-ACMA, Setco is oneof the five High Performers ofthe Indian Auto Industry
Setco Edge – Innovation at every step
15
OE
FITMENT
OES
AFTER
MARKET
REMAN
SOLUTION
CUSTOMER LIFECYCLECUSTOMER LIFECYCLE
CUSTOMER
REQUIREMENTCUSTOMER
REQUIREMENT
SEVERE APPLICATION
EASE OF SERVICIBILITY
LONG LIFE
SEVERE APPLICATION
EASE OF SERVICIBILITY
LONG LIFE
Source: company
LIPE for Life – Brand Philosophy
16
Indian Automotive IndustryIndian Automotive IndustryIndian Automotive IndustryIndian Automotive Industry
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� The Indian automotive industry offers great potential considering the low penetration along with rising income levels and a rapidly growing middle class
� The Indian and Chinese markets make up nearly half of the world`s truck demand and India ranks 7th in CV production
� India is amongst the most competitive auto component manufacturers in the world and this industry has the potential to reach $85 bn by 2015 and $113 bn by 2020
� Domestic market is projected to grow at 8-10% per annum in the next 10 years
� Exports projected to grow at over 20-30% per annum
� The growth expected in the domestic automobile industry will give a fillip to the auto component industry
� De-regulation and the Government’s policy initiatives have facilitated growth and focus has now shifted towards attracting foreign direct investments
� Road development is a priority sector for India and the investment in road sector during the 12th five year plan is projected at 20% of the total investment of USD 1tn which will give a boost to demand for vehicles and indirectly auto components
Industry Facts
18
TwoTwoTwoTwo----wheelers wheelers wheelers wheelers
Mopeds
Scooters
Motorcycles
Electric two-
wheelers
Passenger vehicles Passenger vehicles Passenger vehicles Passenger vehicles
Passenger cars
Utility vehicles
Multi-purpose
vehicles
Commercial Commercial Commercial Commercial
vehicles vehicles vehicles vehicles
Light commercial
vehicles
Medium and heavy
commercial vehicles
Farm Equipment
ThreeThreeThreeThree----wheelers wheelers wheelers wheelers
Passenger
carriers
Goods
carriers
Automotive Automotive Automotive Automotive SegmentSegmentSegmentSegment
Source: IBEF
Industry Overview
19Source: SIAM
549549549549 417417417417 568568568568761761761761
929929929929 832832832832630630630630 687687687687
1,4201,4201,4201,420
2,3502,3502,3502,350
2007-082007-082007-082007-08 2008-092008-092008-092008-09 2009-102009-102009-102009-10 2010-112010-112010-112010-11 2011-122011-122011-122011-12 2012-132012-132012-132012-13 2013-142013-142013-142013-14 2014-15E2014-15E2014-15E2014-15E 2015-16E2015-16E2015-16E2015-16E 2020-21E2020-21E2020-21E2020-21E
Growth in the number of units Commercial Growth in the number of units Commercial Growth in the number of units Commercial Growth in the number of units Commercial VehiclesVehiclesVehiclesVehicles (in’000)
275275275275
184184184184245245245245
323323323323 348348348348
269269269269201201201201 213213213213216216216216 201201201201
288288288288362362362362
461461461461524524524524
432432432432 458458458458
2007-082007-082007-082007-08 2008-092008-092008-092008-09 2009-102009-102009-102009-10 2010-112010-112010-112010-11 2011-122011-122011-122011-12 2012-132012-132012-132012-13 2013-142013-142013-142013-14 2014-15E2014-15E2014-15E2014-15E
MHCVMHCVMHCVMHCV LCVLCVLCVLCV
(in’000)
Industry Trend
20
Wabco (9)Wabco (9)Wabco (9)Wabco (9) Bosch (10)Bosch (10)Bosch (10)Bosch (10) MothersonMothersonMothersonMotherson
SumiSumiSumiSumi
Systems (14)Systems (14)Systems (14)Systems (14)
LumaxLumaxLumaxLumax
IndustriesIndustriesIndustriesIndustries
(15)(15)(15)(15)
ZF SteeringZF SteeringZF SteeringZF Steering
(20)(20)(20)(20)
ExideExideExideExide
IndustriesIndustriesIndustriesIndustries
(23)(23)(23)(23)
Setco (28)Setco (28)Setco (28)Setco (28)
53.7253.7253.7253.72
44.3944.3944.3944.3939.639.639.639.6 38.6638.6638.6638.66
28.5628.5628.5628.5623.3923.3923.3923.39
19.3819.3819.3819.38
TTM PETTM PETTM PETTM PE
Wabco (3)Wabco (3)Wabco (3)Wabco (3) Bosch (6)Bosch (6)Bosch (6)Bosch (6) ExideExideExideExide
IndustriesIndustriesIndustriesIndustries
(18)(18)(18)(18)
ZF SteeringZF SteeringZF SteeringZF Steering
(19)(19)(19)(19)
MothersonMothersonMothersonMotherson
SumiSumiSumiSumi
Systems (26)Systems (26)Systems (26)Systems (26)
Setco (29)Setco (29)Setco (29)Setco (29) LumaxLumaxLumaxLumax
IndustriesIndustriesIndustriesIndustries
(71)(71)(71)(71)
6.036.036.036.03
4.764.764.764.76
1.531.531.531.53 1.381.381.381.38 1111 0.940.940.940.940.270.270.270.27
Mkt Cap/ SalesMkt Cap/ SalesMkt Cap/ SalesMkt Cap/ Sales
Mcap/ Sales ratio Mcap/ Sales ratio Mcap/ Sales ratio Mcap/ Sales ratio of 1.5 will ensure of 1.5 will ensure of 1.5 will ensure of 1.5 will ensure entry into top 20 entry into top 20 entry into top 20 entry into top 20 companiescompaniescompaniescompanies
Industry Positioning
21
Setco is able to manage the increase in input costs and pass on the differential to its end clients
Presence in the OEM & Aftermarket acts as a natural hedge against
cyclical fluctuations of economy
Stays ahead of the Technological shifts through its R&D centers in
India & UK and is well equipped to meet new norms well in time
It is the preferred supplier to major OEMs with an established brand
name “LIPE”
VUCA in Setco
VVVVolatility olatility olatility olatility in in in in
Input Input Input Input CostsCostsCostsCosts
UUUUncertaintyncertaintyncertaintyncertaintyabout macro about macro about macro about macro
economic factorseconomic factorseconomic factorseconomic factors
CCCComplexity omplexity omplexity omplexity related to tech related to tech related to tech related to tech
changes, changes, changes, changes, regulatory shiftsregulatory shiftsregulatory shiftsregulatory shifts
AAAAmbiguity about mbiguity about mbiguity about mbiguity about customer customer customer customer
preferencespreferencespreferencespreferences
22
The Black boundary depicts Setco’s presence
Five Axes
Value Chain
Geography
Adjacent Industries
Automobile Sector
Key Customers
After SalesService
Manufacturing
IAM OESOEM
Manufacturing & Sales abroad
Exports India
Aerospace & Defense
Power
2/3 Wheeler & Cars
Utility Vehicles
CVs
Farm Equipment
Construction Equipment
Railways
REMAN
Training
R & D
Value ChainSetco present in entire Value Chain from Manufacturing to After Sales Service
GeographyPresent in all 3 geographies & focusing on increasing Manufacturing & sales abroad
Adjacent IndustryNo plans to enter adjacent industries but may explore option in distant future
Automobile SectorPlans to foray into tractors this year. No plans to enter Passenger segment
Key CustomersCaters to entire Life Cycle with recent foray into IAM. Future plans to enter REMAN as well
23
� Harish Sheth – Founder, Chairman & Managing Director
� Udit Sheth – Executive Director
� Shvetal Vakil – Executive Director
� Ronobir Kumar Ghosh- Director - Technical
� Niraj Kumar Mittal – Chief Operating Officer
� A. V. Srinivas – Vice President - Manufacturing
� Jatinder Singh Gujral – Vice President - Commercial
� Vinay Shahane – Asst. Vice President – Finance
� Hans Gramberger – Director - International Marketing (Europe)
� Steve Haworth – Executive Director (Setco United Kingdom)
� Rajiv Iyer – Vice President (Setco North America)
Global Leadership Team
24
Setco Setco Setco Setco KalolKalolKalolKalol Complex, GujaratComplex, GujaratComplex, GujaratComplex, Gujarat Setco Haslingden, Lancashire, UKSetco Haslingden, Lancashire, UKSetco Haslingden, Lancashire, UKSetco Haslingden, Lancashire, UK
Setco, Sitarganj, UttarakhandSetco, Sitarganj, UttarakhandSetco, Sitarganj, UttarakhandSetco, Sitarganj, Uttarakhand Setco Paris, TN, USASetco Paris, TN, USASetco Paris, TN, USASetco Paris, TN, USA
Global Manufacturing Presence
25
Road Ahead…Road Ahead…Road Ahead…Road Ahead…
Cross Rs. 10 Cross Rs. 10 Cross Rs. 10 Cross Rs. 10 bnbnbnbn turnover by FY turnover by FY turnover by FY turnover by FY 2017201720172017----18 on consolidated basis18 on consolidated basis18 on consolidated basis18 on consolidated basis
26
� CV Industry (Source: SIAM)CV Industry (Source: SIAM)CV Industry (Source: SIAM)CV Industry (Source: SIAM)
CV industry is poised to grow on the back of recovery in the Indian economy and revival in the industrial and mining sectors
CV industry is likely to grow at 7-9% in FY15 and register a CAGR of 16% during FY2013–20
� MHCV IndustryMHCV IndustryMHCV IndustryMHCV Industry
Domestic OEM sales to pick up from mid-FY15E with a sharp recovery in M&HCVs (volume growth of ~25-30%). Also the replacement cycle is expected to pick up pace
� LCV IndustryLCV IndustryLCV IndustryLCV Industry
LCVs are estimated to grow 4-7% in FY15
� Tractor Industry (Source: ICRA)Tractor Industry (Source: ICRA)Tractor Industry (Source: ICRA)Tractor Industry (Source: ICRA)
Tractor industry expected to grow by 4-6% in FY15 and of 8-9% in sales by volume for the tractor industry over the next five year
Driven by Industry growth
27
The recent JV of Setco’s subsidiary with Lingotes, Especiales – Spain to manufacture fully machined castingsWill cater to Setco’s Captive Consumption and additional Capacity will cater to outside customers
Lava Cast ProjectLava Cast ProjectLava Cast ProjectLava Cast Project
Plans to go for Backward IntegrationThis critical raw material is currently being imported from Europe and will help bring technology in India , control Quality and help reduce cost
Diaphragm Spring PlantDiaphragm Spring PlantDiaphragm Spring PlantDiaphragm Spring Plant
Up-gradation and modernization of plant to help capacity buildingExpansion in Expansion in Expansion in Expansion in KalolKalolKalolKalol & & & & UttarakhandUttarakhandUttarakhandUttarakhand plantsplantsplantsplants
In order to stay ahead of technology and offer world class products to customers in India and globallyInvestment in R& DInvestment in R& DInvestment in R& DInvestment in R& D
Exploring the vast opportunity in Remanufacturing market which is a high margin business
REMANREMANREMANREMAN
Driven by Expansion
Capex of
Rs. 2,790 M [FY 13 – 15]
28
ParticularsParticularsParticularsParticulars 2012201220122012----13 A 13 A 13 A 13 A 2013201320132013----14 A 14 A 14 A 14 A 2014201420142014----15 P 15 P 15 P 15 P 2015201520152015----16 P 16 P 16 P 16 P 2016201620162016----17 P 17 P 17 P 17 P 2017201720172017----18 P 18 P 18 P 18 P
Sales 3,408 3,287 4,776 5,823 7,002 8,554Raw material Cost 2,050 1,988 2,852 3,465 4,159 5,081Other Expenses 611 653 835 961 1,120 1,369Personnel exp 269 305 407 437 525 599EBITDA 478 342 683 961 1,197 1,506Other Income 85 132 81 80 100 100Depreciation 92 105 149 168 172 175Interest 174 202 281 321 290 259Tax 64 63 86 143 217 304Extraordinary Item 0 77 0 0 0 0
PAT 273 232 281 448 619 867EPS 10.3 8.7 10.5 16.8 23.2 32.5
EBITDA (M) 14.0% 10.4% 14.3% 16.5% 17.1% 17.6%PAT (M) 8.0% 7.1% 5.9% 7.7% 8.8% 10.1%
Financial Snapshot
Standalone Profit and Loss StatementRs in Mn
29
Dhiren Shah, MD
M. Com, LL. B, FCA, Grad CWA
dir: +91 22 4030 2001 m: +91 98337 70404
Moneshi Shah, Partner
B. Com, ACA
dir: +91 22 4030 2005 m: +91 98337 70402
1. This Report is prepared on the basis of the sources of information provided by the management of the Company. We have not independently verified any of the information so provided.2. We assume no responsibility for the accuracy and completeness of information presented in this Report and will not be held liable for it under any circumstances. We have not made an appraisal or
independent valuation of any of the assets or liabilities of the Company and have not conducted an audit, or due diligence, or reviewed/ validated the projections/ financial data provided by the Management. We have relied on the judgment of the Management and auditors of the respective companies in understanding the contingency nature of liabilities; accordingly our valuation does not consider the assumption of contingency liabilities materializing.
3. Our analysis is based on the market conditions and the regulatory environment that currently exists. However, changes to the same in the future could impact the Company and the industry it operates in which may impact our valuation analysis.
4. For our analysis, we have relied on published and secondary sources of data, whether or not made available by the Company. We have not independently verified the accuracy or timelines of the same.5. Neither Moneybee nor any of its affiliates are responsible for updating this Report because of events or transactions occurring subsequent to the date of this Report. Any updates or second opinions on
this Report cannot be sought by the Management from external agencies including other offices of Moneybee without its prior written permission
Ipshita Roy, Sr. Associate
CFA, MS(Finance)
dir: +91 22 4030 2052 m: +91 99876 57415
Moneybee Advisors Pvt Ltd
303, Tower A, Peninsula Business Park, G. K. Marg,
Lower Parel (W), Mumbai 400 013
b: +91 22 4030 2010 f: +91 22 4030 2000
e: [email protected] w: www.moneybee.in
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Contact
21st August 2014
