Price: Rs. 1273

FY 2018 Results on 26th May, 2018)

Steel Strip Wheels Limited (“Steel Strip” or the “Company”) designs & manufactures automotive steel wheels since 1991. The Company is the second largest designer, manufacturer and marketer of steel wheel rims for passenger cars, utility vehicles, two/three-wheelers, tractors, light/heavy commercial vehicles and over the roads (OTRs).

The Comany has manufacturing units in Dappar (Punjab), Oragadam, (Chennai), Jamshedpur (Jharkhand), and Mehsana, Gujarat.

Strong Customer Base – Ashok Leyland, BMW, Daimler India, Escorts, FIAT India, Honda Cars, Honda Motorcycle and Scooter, Hyundai Motor India, Jaguar Land Rover, John Deere India, M&M, Maruti Suzuki, Piaggio Vehicles, Renault–Nissan, SML Isuzu, Tafe Motors & Tractor, Tata Motors, Volkswagen, VE Commercial Vehicles.

Financials – (Note –FY 2018 Results on 26th May, 2018)

Particulars FY14 FY15 FY16 FY17
Revenue (In Rs. Cr.) 1,063.83 1,152.82 1,181.89 1,331.66
Growth 8.37% 2.52% 12.67%
EBITDA (In Rs. Cr.) 99.46 107.59 145.30 164.19
EBITDA Margin 9.35% 9.33% 12.29% 12.33%
PAT (In Rs. Cr.) 24.33 39.40 61.18 71.04
PAT Margin 2.29% 3.42% 5.18% 5.33%
EPS (In Rs.) 15.98 25.81 39.91 45.81
Historic P/E (Closing Price of 31st March) 9.04 10.85 8.51 18.02
CURRENT P/E (based on price of 21st  May – Rs. 1263.30 and EPS TTM – Rs. 47.13) 26.80
D/E 1.81 1.41 1.30 1.63
Interest Coverage 2.44 2.60 3.38 3.94
ROCE 9.73% 11.22% 13.76% 11.51%
ROE 6.68% 9.88% 13.33% 13.12%

WHAT’S DRIVING THE STOCK

Strong Clientele – Maruti Suzuki, Mahindra & Mahindra, Tata Motors, Honda Seil Cars, BMW, Jaguar Land Rover and many others.

SHARE OF BUSINESS
Client Share as a % of Total Requirement
Maruti Suzuki 52%
Tata Motors 58%
Mahindra & Mahindra 56%
Honda Siel Cars 80%
Ashok Leyland 50%
Renault Nissan 62%
BMW 10%
Jaguar Land Rover 35%

 Strong Market Position

Steel Strip Wheels enjoys a strong market share across the auto sector in steel wheels. The Company has around 50% of market share in passenger vehicle segment (PV), around 44% in tractor, 44% in commercial vehicle and around 70% in off the road vehicles. Steel Strip Wheels has established relationships with original equipment manufacturers (OEMs) in all these segments and has been able to enter several new passenger car launches in the recent past such as Maruti Baleno, Tata Tiago, Maruti Brezza etc.

Capacity Expansion To Meet Rising Demand

In Q3 FY 2018, the Company’s overall capacity utilization was 89% (Dappar plant operating at 91.3%, Chennai at 79% and Jamshedpur at 112%). In order to meet rising demand from the commercial vehicle segment and drive exports from Chennai, the Company has commissioned its truck wheel plant in Chennai. This new Chennai truck wheel plant will add 1.2 million wheels capacity to the already existing 1.8 million wheels capacity. Total capacity of the truck wheel segment now stands at 3 million wheels, which makes Steel Strip the largest truck steel wheel maker in India. The Company has also forayed into alloy wheels and has set up a plant in Mehsana with an initial capacity of 1.5 million units.

Entered the Alloy Wheels Segment

Over the last couple of years, the market share for steel rims has fallen to 75% from 85%. Earlier, alloy wheels used to be part of premium vehicles but over the years they have become popular for the mid-size segment as well. To capture this growing demand for alloy wheels, Steel Strip has forayed into the segment and set up a plant in Mehsana with an initial capacity of 1.5 million wheels per annum. The plant got operational in October 2017 and the Company has already received certain orders from 6 OEMs till now.

Due to advantages of better appearance than steel wheels, enhanced aesthetic appeal, light weight, better fuel efficiency and adherence to stricter emission norms, the price of alloy wheel is 4-5 times the steel wheel which will have a positive impact on the margins of the Company.

Efforts to Capture Growth Opportunity in the Commercial Vehicle (CVs) and Tractor Sector

The Company is considering setting up of a new manufacturing facility for production of steel wheels for the CV and the tractor segment at Pune. This will be the fourth plant to be set up to service this category of vehicles. At present, the Company’s Punjab, Chennai and Jamshedpur facilities supply to the CV and tractor segments.

The Company plans to invest Rs. 200-Rs. 220 Cr. About 60% of this amount will be funded through external debt and the balance through internal accruals.

The Company sees opportunity emerging in the commercial vehicle sector post the government’s decision to deregister CVs after 20 years starting 2020. This will trigger fresh demand for replacing the existing fleet of vehicles. In addition, the upcoming BS-VI regime from 1 April 2020 will involve a lot of pre-buying activity.

WHAT’S DRAGGING THE STOCK

High Leverage

The Company operates high debt/equity ratio of 1.63x in FY 2017.  As of 31st December, 2017, the Company’s debt levels stood at ~Rs. 850 Cr. (~Rs. 600 Cr LT debt and ~Rs. 250 Cr ST debt). The increase in leverage was due to debt-led capex for the construction of the alloy wheel plant in Mehsana. The Company’s debt profile is further going to increase due to new capex plan of setting up a manufacturing facility for production of steel wheels for the CV and the tractor segment at Pune.

32.33% OF PROMOTER HOLDING IS PLEDGED.

Competition from Other Alloy Wheel Manufacturer