Jamna Auto - A Proxy Infra Play, High Return Ratios, Inexpensive Valuations: ICICI Direct

ICICI Direct Report

Investment Rationale

Proxy play on infra led medium and heavy commercial vehicle cyclical recovery:

Domestic M&HCV industry has staged a remarkable recovery with industry sales volumes in FY23 pegged at 3.6 lakh units versus a low of 2.25 lakh units clocked in FY20. Going forward with robust infrastructure spending by the government and revival in private capex cycle the industry is seen surpassing its pre-Covid levels and record a new high in FY24E at ~4.0 lakh units.

Jamna Auto Industries Ltd. is a key suspension product supplier to this space with industry leading market share and is expected to be an outsized beneficiary of the same. Going forward on a high base, we expect Jamna Auto to report sales compound annual growth rate of 15.1% over FY23-25E. With increasing share of parabolic springs, higher exports and aftermarket sales and operating leverage at play, we see Ebita margins inching up to 13.6% mark in FY25E.

Lakshay 50XT aimed at diversification, bodes well for growth longevity:

Jamna Auto has traditionally been a suspension product supplier to commercial vehicle original equipment manufacturers in India. Sensing the greater export and aftermarket opportunity as well as intent to de-risk its existing commercial vehicle dependent business, Jamna Auto has chalked out an ambitious program i.e., Lakshay 50XT wherein its intent is to drive 50% revenues from new products (44% in FY23, 48% in Q1 FY24; recently launched agriculture implements) and 50% revenue from new markets (20% in FY23, 21% in Q1 FY24) by FY27E while clock 50% return on capital employed and go for 50% dividend pay-out in the similar timeframe. This will greatly help Jamna Auto diversify thereby reducing the inherent cyclicity at its base business and provide stable growth longevity.

Healthy return ratios and cash surplus balance sheet provide good margin of safety:

Jamna Auto has a highly capital efficient business model wherein it realises healthy more than or equal to 25% RoCE’s (amid ~>=three times asset turns, double digit Ebitda margins, controlled working capital cycle), realises healthy positive cash flow from operations (current CFO yield at ~6%) and has net cash positive balance sheet; thereby providing high margin of safety to our positive call on company.

Rating and target price

• We assign 'Buy' rating on Jamna Auto tracking cyclical upswing in domestic CV space amidst robust infra spends by government and revival in private capex cycle, the company’s intent to diversify both in terms of products and markets, healthy financials in terms of 25% RoCE’s and net cash positive balance sheet and inexpensive valuations (16 times price-to-earning on FY25E).

• We assign a target price of Rs 135 on Jamna Auto valuing it at 20 times P/E on FY25E with muted commodity price outlook seen supporting margins in near to medium term.

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