Long-term investors can use the current dip in the market to build up positions in Clutch Auto. The company is India’s largest manufacturer of automotive clutches with the know-how to manufacture the full range of clutch plates and assembles for commercial vehicles (CVs) and heavy-duty applications.
In the past, the company suffered a bad patch due cash-flow problems and high-cost debt burden. It also took time to master the clutch technology. But the worst is over now. The company is likely to be a major gainer due to an over 30% YoY growth in CV sales and auto component outsourcing from India.
Technology development: Globally, clutch manufacturing is a proprietary technology controlled by a handful of companies in Japan, West Europe and North America. Clutch Auto has joined this elite club and is the biggest supplier to CV and farm equipment manufacturers in India.
Due to its efforts in re-engineering and R&D, the company has filed 18 patents in India and 11 in the US for its in-house innovations in clutch technology. Having access to its own technology gives the company an advantage over its domestic competitors, which depend on their foreign JV partners for technology. This not only reduces their time-to-market, but also makes their products costlier, as they have to pay royalty and technical fees to their foreign partners.
The low-cost manufacturing base in India gives Clutch Auto a competitive edge over global majors like Eaton Corporation, Luk, Valeo, Exedy Corp and ZF Friedrichshafen. At present, exports account for around 30% of the company’s net sales, with North America being its biggest market.
Low-cost expansion: Having consolidated its operations, the company is now working on a three-year capacity expansion (capex) plan to triple its production capacity to 4 million units of clutch plates and clutch assemblies by FY10, from around 1.4 million units currently.
Expansion is being done at a relatively modest cost of Rs 30 crore — almost a third of its FY06 gross block of Rs 87 crore. The company says basic infrastructure and common facilities are already in place. It merely has to invest in some balancing and finishing equipment to raise its capacity.
With operating margins at 16% during April-December ’06 and set to improve further, capex will be funded via internal accruals, thus protecting the company’s bottomline from an increase in interest rates.
The capex is part of its plan to triple its revenues to Rs 650 crore by the end of financial year ’09-10, against the estimated Rs 210 crore at the end of March ’07. During the same period, contribution of exports in its revenues will rise to 50% from around one-third at present.
To control its raw material cost, the company recently acquired the assets of Gurukripa Founders & Engineers (GKF), a promoters’ concern. GKF is engaged in the production of castings used in clutch manufacturing. This acquisition will give the company a better control over its input costs. It is now in the process of augmenting it capacity to 1,200 tonnes per month from 750 tonnes.
Financial restructuring: The company has implemented a debt-restructuring plan, under which, it pre-paid a part of its loan by raising equity and refinancing the balance with low-cost term loans. This resulted in a significant turnaround in Clutch Auto’s financial ratios.
From a high of 4.9 during FY04, its debt-to-equity ratio declined to 1.3 during FY06 and is expected to improve further to 0.8 during FY07. Interest coverage during the period improved from 2 in FY04 to 5.4 in the first nine months ’06-07. This has significantly strengthened the company’s balance sheet, making it less vulnerable to any downturn in the industry’s fortune and rise in interest rates.
Financials: In the first nine-months of FY07, Clutch Auto’s net profit jumped 42% YoY to Rs 12.2 crore, while its operating profit grew 35% YoY to Rs 21.7 crore. Its bottomline growth was led by a 39% YoY growth in net sales to Rs 139 crore and savings on account of slower growth in interest payment and depreciation allowance.
While the former grew 35% YoY, the latter grew a mere 4.3% YoY. The only dampener was raw material cost, which zoomed 49% YoY.
Valuations: At the current market price of around Rs 108, the stock is valued at around 3.6 times its FY08 estimated EPS of Rs 30. This is extremely cheap and provides significant upside potential for investors with a 12-18-month horizon.
