Jamna Auto Industries Ltd - Stock Valuation and Financial Performance

Good results amidst seasonally weak quarter. Increasing share of revenue from new products and new markets shall be key monitorable.

About the Company:

Jamna Auto Industries Limited (JAI) was founded in 1954, by Sardar Bhupinder Singh Jauhar. From having a single product with a factory in Yamuna Nagar, JAI has expanded to become an organisation with 8 production units across India catering to all major OEMs, after market in India and Export. JAI is a dominant player in the commercial vehicle suspension product manufacturing industry, primarily producing leaf and parabolic springs for medium and heavy commercial vehicles (M&HCVs). JAI's extensive customer base includes prominent commercial vehicle original equipment manufacturers (OEMs) such as Ashok Leyland, Tata Motors, Force, Bharat-Benz, Mahindra, GM, ISUZU, Scania, SML, Escorts, UD Trucks, and Volvo & Eicher. With a total installed capacity of around 3,00,000 metric tonnes, JAI commands a remarkable market share of over 68% in India. JAI is not only the undisputed leader in the Indian market but is also among the top two global players. The company faces has two main domestic rivals, Toyo Springs (~ 20% market share) and Soni Auto (~5% market share), while the rest of the market is highly fragmented.

Financials

The financial profile of JAI is characterised by healthy profitability, return ratios and cash accruals. Even though the company operates in the highly cyclical Commercial Vehicles Industry, it has a track record of maintaining good ROE & ROCE over the last decade. ROCE has ranged from 8% in the sluggish year of 2014 to 30-35% at peak levels in FY16-19. Higher asset turnover during the years 2016-2019 meant ROEs in the range of 30-37%. The company has been consistent in maintaining dividend payouts with targeted Payout Ratio of 50%.

(Source: Company data, Moneyworks4me)

About the Management:

Mr. Randeep Singh Jauhar : Chairman & Executive Director

Mr. Pradeep Singh Jauhar : Managing Director & CEO

Future Prospects:

Shift to Parabolic Springs:

The Indian Springs market is about 5,000 Cr. JAI holds a dominant position in India with over 90% market share in parabolic springs and more than 65% in the OEM market. Customers benefit from the use of parabolic springs as they offer improved ride quality, reduced weight, greater stress handling capabilities, and increased fatigue life due to lower inter-leaf friction. JAI is providing this innovative technology product at a lower cost per vehicle compared to traditional springs. From the company's perspective, parabolic springs offer a better absolute value per tonne and higher margins compared to conventional springs due to reduced raw material consumption. Consequently, as the industry shifts from conventional to parabolic springs, the company anticipates generating increased profit margins.

Focus on Aftermarket & Exports to provide sustained growth:

JAI is targeting the Aftermarkets segment, where it currently holds 20% market share as opposed to more than 65% in the OEM segment. Furthermore, margins in the aftermarket segment are 3-7% higher than those in the OEM segment. This shall lead to growth as well as increasing margins. As demand continues to rise, the company is expected to benefit from operating leverage. Although demand for Medium and Heavy Commercial Vehicles (MHCV) is cyclical, the company's increasing contribution from the Aftermarket (AM) segment, which is less susceptible to cyclical fluctuations in CV demand, is expected to support its margins. At present, exports comprise a negligible fraction of JAI's business, amounting to less than 1%. However, the management aims to increase this figure to 10% in the future.

By the financial year 2027, JAI intends to derive 50% of its product portfolio from new markets & new products. The company is taking steps towards achieving this target by introducing a range of new products, including the Z-Spring, Stabilizer bar, Bus Air Suspension, and Trailer Air Suspension, in addition to the continued success of Parabolic Leaf Springs. JAI has also diversified into Aftermarkets and exports, with the launch of products like Brake Lining, Trailer Axle, and Bearing. To cater to OEMs, the company has unveiled products such as Bogie Bracket, NODO bracket, and Spring Pin.

 “LAKSHYA 5-YEAR PLAN”

Planning for the next 5 years, the management in FY21, came up with “LAKSHYA 5-YEAR PLAN”

The objective of this plan is to achieve future growth and to de-risk the business through market and product diversification. The plan aims at to Achieve 4 key targets by FY27:

• 50% revenue from new market: Focus on improving the after-market and exports segment revenue mix to ~50% by FY27.
• 50% from new products: JAI’s action plan is to introduce new products such as allied parts for suspension, machined parts, full range of trailer suspension and other products.
• 50% Return on Capital Employed: With the company’s prudent financial policies, higher margin and increased share of value-added products, JAI targets 50% ROCE by FY27.
• 50% Dividend distribution policy: By FY27, JAI targets dividends at 50% of PAT.

This is how the JAI has fared in FY 2022 with its targets:

(Source: Company data, Moneyworks4me)

Risks:

• If the anticipated CV upcycle does not play out as expected, company might see stagnant growth even after gaining market share in newer segments due to overall industry remaining stagnant.
• “Key man risk” would have a significant impact in JAI as it is a promoter family managed company.   
• The firm has lower experience in aftermarket segment and might need much more time to gain market share in this segment.