Updated: Jun 18
Company Name – Sansera Engineering Limited (Sansera)
Current Share Price – INR 743 (March 6, 2023)
Market Cap – INR 3,930 cr
1. What is interesting about the stock?
Precision engineering is a subdiscipline of electrical engineering, software engineering, electronics engineering, mechanical engineering, and optical engineering concerned with designing machines, fixtures, and other structures that have exceptionally low tolerances, are repeatable and are stable over time. Precision engineering is the design and production of parts with tolerances measured in microns, that’s one-thousandth of a millimeter. Designing precision components that have low engineering tolerances and offer long-term stability requires many considerations such as positioning of features and load limits. Precision is a synonym for reliability and variable error. The validity of a measurement instrument or psychological test is established through experiment or correlation with behavior. Precision engineering is the process of designing and manufacturing machines and components that meet precise specifications. This field requires a high degree of accuracy and attention to detail, as even small errors can have major consequences. One such company in India is Sansera.
Sansera Engineering Limited is an integrated manufacturer of complex & critical precision-engineered components for automotive (2-wheelers, passenger vehicles, commercial vehicles) & non-automotive (aerospace, off-road, agriculture, etc.) sectors. Its automotive product range includes connecting rods, rocker arms, crankshaft, gear shifter fork, and stem comp among others. Sansera has 16 manufacturing facilities across India located across the states of Karnataka, Haryana, Maharashtra, Uttarakhand, Gujarat, and Sweden. India accounts for 91% of sales while Sweden for 9% of sales. The Company did its IPO in Sept ’21 with an offer-for-sale from its existing shareholders.
The top 5 customers accounted for 54% in FY22 (59% for FY21) of product sales (single-largest customer accounting for 17% (21% for FY21). The Company supplies to 9 out of the top 10 automakers in India and its clientele includes:
Two-Wheelers: Bajaj, Harley Davidson, Hero, HMSI, KTM, Royal Enfield, Yamaha
Passenger vehicles: FCA, Honda Cars, Maruti Suzuki, Toyota, Volkswagen,
LCV/HCV: Ashok Leyland, CNHi, a leading Japanese OEM, a leading German OEM, a leading Swedish OEM
Aerospace: Boeing, UTAS, a leading European OEM
Off-road vehicles and other segments: Bosch, JCB, Polaris
The Company has completed the construction of a new aerospace and defense plant in Bengaluru. This plant will be fully operational by Mar 2023 and has the potential to achieve a topline of up to INR 350 cr, at a full capacity utilization level.
As on December 2022, the order book of new business with annual peak revenues stood at INR 1,500 cr, with auto ICE contributing INR 734 cr (49%), auto tech-agnostic adding INR 452 cr (30%) and non-auto accounting for INR316 cr (21%). The domestic business contributes 51% of this order book.
Why invest in Sansera?
Ability to adapt to evolving industry dynamics – the Company has designed adaptable equipment that allows it to interchange products reducing time and cost. The Company has good machine building, automation, and advanced engineering capabilities that allow it to reconfigure machines and avoid technological obsolescence.
Increasing the share of aluminum forging – the Company has a current utilization of aluminum forging at ~35%, which it is trying to increase going forward. The increased utilization can increase the margins earned by the Company.
Non-automotive segment to diversify product portfolio – the Company derives ~11% of its revenue from other segments like aerospace and defense.
EV's next big opportunity – the Company derives ~6% of its revenue from auto-tech and EV clients. Given that there is a good growth
2. Key Historical Financials
Company revenue and profit have been growing 7% and 8% on a CAGR basis respectively in the last 3 years
Revenue increased by 28% in FY22 on a YoY basis after weak FY20 and FY21. Growth has continued in 9MFY23
EBITDA margin is stable at around 15-17%
Cash flow conversion (CFO/EBITDA) was healthy in FY20 and FY21. However, the ratio has fallen to 63% in FY22 due to a jump in receivables
ROCE and ROE have improved to 14% in FY22 from 10-11% in FY20
3. What is my view on company valuation?
The current price is close to the IPO issuance price of INR 744 implying no return for the last 21 months. IPO was oversubscribed by 11.5x.
The Company is trading at a P/E of ~26x as against the median P/E of ~27x. The sectoral median is also ~20x currently. The Company is no. 1 or 2 in some of the products they produce and hence, the Company has traded at a premium to the sectoral median. Long-term investors could evaluate investing around sectoral median P/E.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Failure to adapt to industry trends and evolving technologies – Certain products like connecting rods and crankshafts are not used in EVs and these are a big part of Sansera’s portfolio. Similar changes in consumer preferences and regulatory or industry requirements might make product lines redundant
Dependence on certain key customers – As any auto component manufacturer is dependent on OEMs and their models, any underperformance by a key model can lead to unexpected changes in the business plan of the Company
Pricing pressure from customers – OEMs tend to keep the margins of their suppliers under check and keep putting pressure thereby limiting upside headroom for profits
About the Author
I have over 18 years of experience in private equity and public markets. I am an engineer by background and MBA from a premier institute in India.
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.