Pick of the Week: Buy Jay Bharat Maruti at CMP and add on dips to Rs348-356 band
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Jay Bharat Maruti Limited (JBML) was incorporated in 1987 as a Joint Venture with Maruti Suzuki India Limited (MSIL) holding 29.3% equity stake as on Dec 31, 2016. JBML is engaged in the manufacturing of sheet metal components and assemblies, besides design and development of dies and moulds, automotive machines and equipment. JBML has four manufacturing facilities, which are located at Gurgaon (Haryana) and Manesar (Haryana). The facilities include imported and indigenous press lines, robotic welding lines as well as plating and painting facilities. Starting with making sheet metal components and assemblies for passenger vehicles, JBML has added capabilities to produce exhaust systems, rear axles, torsion beams and fuel filler necks over the years. Around ~86% of JBML’s sales are to a single customer namely MSIL.
- Maruti’s revamp plan and Suzuki’s new facility in Gujarat could provide greater visibility for JBML,
- Steady raw material prices (after recent rise) could help to maintain margins going forward
- Recent fund raising plan hints at new capacity at Vithalapur (Gujarat) going forward.
- Sound Financial Profile.
- Government’s initiatives could provide more opportunity to generate healthier revenue growth going forward.
- Healthy equity stake by Maruti ensures a good share in MSIL’s component requirement from JBML as well as participation in future expansion by MSIL/Suzuki group.
- Related Party transactions,
- Regulatory risk/risk from electric vehicles,
- Client Concentration risk,
- Rise in raw material and labor cost.
- Slowdown in demand for cars
- Low dividend payout ratio
View and Valuation:
MSIL’s revamp plans to launch new cars across all categories in next three to four years could benefit JBML. Further Suzuki’s plant coming up in Gujarat could also result in better visibility for MSIL. We expect JBML could report decent revenue and profitability growth over FY16-FY19. JBML will benefit due to the healthy outlook for the auto industry, as it translates into healthy demand from OEMs and replacement markets.
With bright prospects for Auto and Auto Ancillary industry and revamp/expansion plans by its customers, we have a positive view on the stock. We feel investors could buy the stock at the CMP and add on dips to Rs. 348-356 band (~12.2x FY19E EPS) for sequential targets of Rs 446 (15.5x FY19E EPS) and 489 (17x FY19E EPS) in 2-3 quarters. At the CMP of Rs 393.50 the stock trades at 13.7x FY19E EPS.
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