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Jamna Auto CMP Rs. 147.95

Auto Ancillaries Target Rs. 173 25thd August 2010

Stock Info

Market Cap (Rs cr) 541

Beta 0.99

52 WK H/L 161.05/45.75

Ave. Daily Volume 10117

Face Value 10

BSE Sensex 18179.64

Nifty 5462.35

Reuters code JMNA.BO

Bloomberg code JMNA@IN

Shareholding Pattern

Promoters 44.75%

MF/Banks/Indian FIs 4.60%

RI/NRIs/OCBs 34.28%

General Public 16.36%

Sumit K Singh

Tel: +91 965 499 6276

E-mail: singhsumitkumar@gmail.com

Website: www.equityresearch.co.cc

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Relative PerformanceJamna SENSEX

Company Background Incorporated as a partnership firm in 1965, Jamna Auto Industries is the largest manufacturer of tapered Leaf and Parabolio Springs for Commercial Vehicle in India, and 4th largest in the world. The company manufactures auto parts and specialize in the manufacture of laminated springs for automobiles ranging from 3 kilograms to 200 kilograms. Parabolic springs, tapered leaf springs, coil springs, and stabiliser bars are used in suspension systems of automobiles. The company is wholly owned subsidiary of Jai Suspension Sytems Ltd.

Product Mix

Prominent Market Share

Strong Joint Ventures

The company has tied up with its immediate global competitor NHK Spring, Japan for technical solutions. It has also entered into JV with Nissho Iwai Corp, Japan and Allevard Ressorts Auto, France for manufacturing

Jamna Auto

Leaf Spring Multileaf Springs

Parabolic Springs

Suspension Products

Design & Engg.

66%3%

11%

3%6%

11%

Jamna Vikrant Friends

Soni Auto Others Toyo

⇒ With 66% market share, Jamna Auto is India’s largest CV spring manufacturer

⇒ With capacity of 144,000 MT, the company fourth largest spring manufacturer

⇒ The Indian and Global OEM market is growing at 8% and 6% p.a. respectively

⇒ Overall CV market in India registered 35% growth in FY10

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Coil Springs and Stabilizer Bars for supplies to the car market in India. UD Truck Corp, Japan has already issued Letter-of-Intent to the company for the supply of leaf springs to its Japanese plant. Jamna has also engaged JIPM, Japan for adopting best manufacturing practices.

Large Customer Base

Future Plans

⇒ The company has set-up a green field project at Jamshedpur with a capacity of 30,000 MTPA and is likely to be fully operational in late 2010. This plant will help to capitalize on the rising demand for leaf & parabolic springs. Its Chennai plant in place with the capacity of 1,44,000 MTPA, the company is now planning to increase its capacity by setting up plants at Pune and Lucknow.

⇒ Parabolic springs comprise 8% of the product mix of Jamna Auto. With increased awareness about the advantages of these kinds of springs, the company is sensing a major shift in OEM demand for parabolic springs. Hence, the company is planning to expand capacities for parabolic springs, which will result in higher contribution from this segment, and thus better margins.

⇒ With technical assistance agreement with the Ridewell Corp, USA, the company has started manufacturing air-suspension and components. This new segment of air suspension system has been growing rapidly with the market size of 4000 units per annum and will diversity the company’s portfolio. The Central Government is planning to purchase 15,000 buses with air-suspension system. Being a dominant player in the market, Jamna Auto will be benefited.

⇒ The company’s exports activity is quite small. With increased production and diversified product-mix, the company will look at export market as well in future.

Industry Overview

Post global financial crisis, the industry has stabilized with original equipment manufacturers experiencing improvement in demand conditions. The springs demand for commercial vehicles in India is expected to grow by 8% annually for next 3-5 years. Given the increasing participation of Indian companies in exporting activities, the Indian automotive industry is going to be benefited with global market growing at 6% annually. The demand for commercial vehicles is increasing which is a healthy sign for the automotive and ancillary industry. Unorganized players have significant share in the replacement market. However, with the introduction of Goods & Service Tax, all the players will be on the same level and there will be big market for the organized players.

Commercial Vehicles

• Tata Motors• Ashok Leyland• Eicher• Volvo• Force Man• TACO Hendrickson• AMW• Diamler• Mahindra NAVISTAR

Light Commercial Vehicles

• Force Motors• Nissan• Swaraj Mazda• ISUZU

Motor Vehicles

• Maruti Suzuki• Ford Motor• M&M• Toyota• General Motors• Mercedes

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Financial Analysis

The company witnessed a collapse in FY2009 due to global recession when sales growth rate plummet to -3.11% from previous year. The Operating Profit Margin was down to 5.48% as compared to 12.31% in the previous year. However, things are improved now when sales growth registered was 23.57% and OPM was back to 10%+ range.

The company reported net profit of Rs. 4.32 crore in the quarter Q1FY2011 as against to net loss of 2.19% during the previous quarter Q1FY2010. Sales rose 85% to Rs. 172.27 crore in the quarter Q1FY2011 as against Rs. 92.94 crore during the previous quarter Q1FY2010.

The company experienced 26% reduction in interest cost – Rs. 26.17 crore in FY2010 compared to Rs. 35.54 crore in FY2009. The company’s current Return on Equity of 33.22% is much higher than that of its competitors: 19.94% of Remsons Ind. and 10.66% of Frontier Springs. Again, current Return on Capital Employed of 27.58% is much higher than that of its competitors: 16.81% for Remsons Ind. and 14.77% for Frontier Springs.

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PAT NPM (%)

15.44% 19.71%29.15%

7.49%

27.58%10.33%

67.29%

31.40%

-37.55%

33.22%

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FY2006 FY2007 FY2008 FY2009 FY2010

ROCE (%) ROE (%)

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Income Statement

(in Rs. cr) FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E Net Sales 210.43 323.72 541.19 513.78 606.02 950.11 1,239.64 Other Income 0.54 2.27 3.41 7.96 17.46 5.19 2.74 Operating Expenses 192.54 300.96 483.83 489.19 552.16 827.54 1,068.42 Operating Profit 18.43 25.04 60.77 32.55 71.32 127.76 173.96 Interest 11.60 12.43 26.94 35.48 25.62 38.91 55.44 Depreciation 3.87 3.79 8.28 9.41 14.07 21.97 31.48 Deferred Revenue Exp. 0.12 1.70 4.57 8.00 10.17 17.91 13.82 PBT 2.83 7.12 20.98 -20.34 21.46 48.97 73.22 Taxation 0.15 0.32 0.43 0.35 0.01 0.59 0.91 Deferred Tax Credit 1.91 0.46 3.58 -4.30 5.57 2.07 3.37 PAT 0.78 6.33 16.97 -16.39 15.89 46.31 68.94

The company has registered growth rate of 26% CAGR in topline and 95% CAGR in bottomline in last five years. Given the strong order book and dominant share in ancillary sector, I expect the company to continue its dream run on the back of strong fundamentals and good management. The operating expenses have come to 271 bps w.r.t. total income in last five years. I expect to see further 250 bps improvement in next two years, which will further improve the margins. The topline and bottomline is expected to be around Rs. 950 crore and Rs. 46 crore in FY2011 and Rs. 1240 crore and Rs. 69 crore in FY2012 respectively, resulting in Net Profit Margin of 4.87% and 5.57% respectively, which is better than that of FY2010, 2.76%.

Balance Sheet

(in Rs. cr) FY2006 FY2007 FY2008 FY2009 FY2010 Share Capital 8.76 17.71 37.37 40.03 40.04 Reserves & Surplus 8.44 -2.61 33.18 27.11 34.92 Secured Loans 76.54 99.28 139.51 138.22 92.46 Unsecured Loans 9.50 0.57 36.22 22.96 22.50 Total Liabilities 103.24 114.95 246.28 228.32 189.91 Net Block 51.51 52.64 95.77 96.54 141.05 Capital WIP 2.65 11.01 36.83 55.96 21.50 Investments 12.08 12.08 5.27 7.22 7.22 Deferred Tax 12.12 1.98 11.57 15.87 10.30 Current Assets 76.51 80.60 189.41 153.90 159.06 Current Liabilities 61.32 49.08 111.93 124.57 176.33 Misc. Expenditure 9.69 5.71 19.36 23.40 27.12 Total Assets 103.24 114.95 246.28 228.31 189.91

The loan component of the balance sheet has declined from 83% of the total assets in FY2006 to 60% in FY2010, which is a good amount of debt component in the balance sheet. The average Current Ratio for last five years is close to 1.34, which is better than Industry average of 0.79. Interest Coverage ratio of 8.27% puts the company’s synthetic debt rating in A+ category with the default spread of 0.70%. The company’s debt-equity ratio has improved drastically from 5.4 in FY2006 to 1.9 in FY2010.

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Two-Stage FCFF Discount Model Valuation

I believe that Jamna Auto will continue to register high growth rate for next 5 years on the back of huge order book and future expansion plans. Thereafter the growth rate will become in-line with nation’s economy growth rate of 5%. To value the company, I believe Free Cash Flow to Cash Model will give a more comprehensive picture.

FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 Terminal EBIT 57.26 105.79 142.48 168.15 211.97 240.77 252.81 Tax rate 30% 30% 30% 30% 30% 30% 30% EBIT (1-t) 40.08 74.05 99.74 117.71 148.38 168.54 176.97 - Capital Expenditure 26.36 31.83 38.57 54.04 70.32 75.17 78.52 - Cng. in Noncash WC -58.08 15.02 22.85 25.49 29.77 31.34 36.03 FCFF 71.80 27.20 38.32 38.18 48.29 62.03 62.42 WACC 13.50% 13.25% 13.00% 12.50% 12.00% 11.00% 10.50% FCFF @ Terminal 1,134.84 PV of FCFF 24.02 30.01 26.81 30.69 36.81 Cumu. PV of FCFF in High growth phase 148.34

PV of FCFF of Terminal Value of Firm 688.84 Value of Operating Assets 837.18 Value of Cash, Marketable securities 14.67 Value of Firm

851.85

Market Value of Debt 218.69 Market Value of Equity

633.16

No. of shares outstanding (cr) 3.65 Fair Value 173.29

Jamna Auto Industries is trading at Rs. 144 per share on 25th August, 2010, which makes it highly undervalued given the calculated Fair Value of Rs. 173 per share. During the economic meltdown last fiscal year, the scrip took a hard beating when the bottomline plummet sharply. With FY2010, the company is back on track and its fundamentals are look strong. The financials have recovered dramatically, signaling the market that the company is on its way to continue high growth in coming years. The Sensitivity Analysis suggests that even if we take a pessimistic view of the key parameters, i.e. cost of capital continue to be at the current level even after five years and terminal growth of the company be on the lower side, the Fair Value would still be equal to the Current Market Price of the scrip, which makes the scrip a safe bet.

Investment Arguments

⇒ On the back of strong demand in the commercial vehicle segments, expanding capacities & product portfolio, adding more location & markets and improving efficiencies, Jamna Auto is likely to show significantly better bottomline performance in next six quarters.

⇒ The company expects its order book to jump significantly in favor of parabolic springs, thereby giving a significant fillip to its profitability.

⇒ After taking the beating in the FY2009, the scrip has recovered substantially but still there is lot of steam left. The company is currently trading at 31.13x TTM P/E. At estimated Forward EPS of Rs. 16.22, the company is trading at 8.87x forward P/E, which indicates a highly undervalued scrip. With the 2-year estimate of PAT growth as 109% CAGR, at current P/E, the PEG ratio stands at 0.28, which again states that the scrip is highly undervalued and has an upside potential.

Sensitivity Analysis Terminal Value

WACC

4.00% 4.50% 5.00% 5.50% 6.00% 9.50% 219 223 226 229 232

10.00% 191 194 197 200 203 10.50% 168 171 173 176 178 11.00% 149 151 154 156 158 11.50% 133 135 137 139 141