Company Name – Sharda Motor Industries Ltd (Sharda Motor) Current Share Price – INR 789 (December 12, 2022) Market Cap – INR 2,345 cr |
1. What is interesting about the stock?
Sharda Motor is the market leader in the manufacturing of exhaust systems. It also manufactures catalytic converters, independent suspension, seat frames, seat covers (Two Wheelers & Four Wheelers), soft top canopies, and pressed part-white goods products. Company was established in 1986. Sharda Motor is fully backward integrated and has nine manufacturing units including the JV plants, three sales offices, and one R&D center. Its plants are located across the country – Nashik, Pune (Maharashtra), Kancheepuram (Tamil Nadu), Haridwar (Uttranchal), Gautam Budh Nagar, Greater Noida (Uttar Pradesh), & Sanand (Gujarat) – near the auto clusters.
Sharda Motors has a market share of ~30% in exhaust systems in the domestic PV industry catering to almost all major OEMs except Maruti. It also caters to major tractor manufacturers like Escorts, TAFE, Kubota, etc., and CV players like Tata Motors, Ashok Leyland, Force Motors, etc. In addition, the company also supplies non-auto players (for Genset applications) like Cummins, Carriers, and, others. Apart from Sharda Motor, the other key players in the Indian market are Tenneco, Faurecia, JBM, and Mark Exhaust in the exhaust systems. In the CV segment Company has a lower market share of 15-20% due to the requirement for high technology, which triggered the need for a JV with Eberspaecher.
In the suspension segment, it has a market share of ~10% with two manufacturing units at Nashik and Pune.
Exhaust systems contribute to more than 85% of the revenue of the Company with the break-up between PV and CV being around 45:55.
Sharda Motor has a high client concentration with M&M and Hyundai contributing to ~70% of revenue.
The Company is benefitting from the BS-VI implementation and is expected to meet the next significant update in emission norms for CEV and tractors (TREM IV) in Jan 2023. It has entered into JV with Eberspaecher to manufacture commercial vehicle exhaust systems in India which would double its addressable CV/CEV market (>2.5L) and increase content per equipment. Even in the PV segment, its content per vehicle is expected to increase by 15% with the implementation of Real Driving Emissions (RDE) norms. Business is highly dependent on the emission norms in ICE vehicles which are becoming stricter leading to higher revenue for the Company. But the shift to Electric Vehicle could be disruptive for the Company.
So, it has also forayed into Electric Vehicle space through a JV with Kinetic Green for developing Battery Packs with Battery Management Systems (BMS) for electric vehicles and stationary applications. SMIL aims to become powertrain agnostic in the next 5-10 years.
Sharda Motor is an auto-ancillary company promoted by the Relan family. The Relan family, along with Maruti Suzuki, has also promoted Bharat Seats. The two businesses are headed by two brothers—Ajay Relan and Rohit Relan—who had been engaged in a feud over the management of the two companies. Brothers had a family settlement in 2019 with the de-merger of the automobile seat business from Sharda Motors.
Why invest in Sharda Motor?
Established market position and strong customer base
Robust balance sheet: free cash balance of ~ INR 280 cr and debt-free; negative working capital
Promoter with more than 36 years of experience
2. Key Historical Financials
Sharda Motors grew by 30% in FY22 and 19% in Q2FY23 on a YoY basis
EBITDA margin has been sat table around 10-11%
Working capital is negative so the cash flow convertibility is excellent
ROE/ROCE has been improving last few years with being 30%/40% in FY22
3. What is my view on company valuation?
Sharda Motor’s share price has increased 5x in the last 3 years with a 3.6x increase in net profit implying some increase in P/E multiple. Currently, Company trades at an EV/EBITDA (TTM) of 6.5x and P/E (TTM) of 13x. Valuation seems to be reasonable given the growth profile of the business.
High concentration risk of revenue with two customers (M&M and Hyundai), dependence on emission norms, and a single pre-dominant product (exhaust systems) could be driving lower valuation multiples.
On an overall basis, the Company looks interesting and long-term investors can further evaluate it.
4. What are the risks to the investment analysis?
Risks to the analysis are:
JV are loss-making or near break-even
Limited scope of export – each country has own emission norms and the exhaust system is not an easy product to export
Company not catering to market leader Maruti
About the Author
I have over 17 years of experience in venture capital, private equity, and investment banking in India and the Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.
I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).
I am an Insignificant Investor in the public market and co-founder of SocInvest.
Disclosure
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.