Absorbing Shocks

Gabriel India Limited (GIL) is a flagship company of the Anand group. GIL is the third largest manufacturer and supplier of ride control products such as shock absorbers, struts and front forks in India. It has presence in all the segments of automobiles - two and three wheelers, passenger cars, utility vehicles and commercial vehicles. The company has six manufacturing facilities with a combined capacity of over 20 million units that are situated close to its clients, ensuring timely delivery of products and spares to original equipment manufacturers (OEMs) at low costs.

The company's client portfolio includes all leading OEMs including Tata Motors, Ashok Leyland, Maruti Suzuki, TVS Motors, Yamaha, Bajaj Auto, Honda Motorcycles, Hyundai Motors, Ford, Eicher Motors, Mahindra and Mahindra, Toyota and Fiat. Its 80 per cent of sales is to OEMs and volume growth from OEMs is a key growth trigger for the company. The company is also a leading supplier to the defence, railways and aftermarket segments in India. Starting its operations in 1961, from its factory in Mulund, Mumbai, the company has participated in the development of the automotive industry in India and increased its production capacities in line with the changing face of the sector.

Sector outlook
The growth of the company is linked to the growth of the automobile sector. The company has diversified its risk by supplying to all segments of automobiles; this strategy would help the company to benefit from rising sales of one segment negating the impact of slowdown in other segment. According to a recent Fitch Rating report, the outlook of the Indian auto supplier sector remains stable in 2012. This stability is largely to do with the expectation of stable credit profiles, despite moderation in revenue growth. However, smaller players catering to limited products or market segments are likely to be affected until the macroeconomic situation improves according to the report.
Localisation: The focus on localisation by OEMs, in an attempt to curtail costs and diversifying the geographical spread of suppliers, is expected to drive the growth for auto supplies amid subdued auto sales.
Rupee depreciation: Although a depreciating rupee is of concern, according to the report, it does pose benefits to the auto-component suppliers in India. On the one-hand India is still a net importer of auto components, which presents a significant opportunity for domestic auto suppliers to be sought after to reduce the high import costs. On the other, demand is likely to remain subdued in developed markets such as Europe, which means the depreciation of the rupee enhances India's export competitiveness. In this scenario OEMs will be prompted to source from Indian amid rising import costs.
Capital expenditure. Further, the Fitch report states that component-manufacturers will have to make significant investments to build on capacity and improve technical capability to meet the standards expected by the OEMs. The investment needs for capitalising on the opportunity seems very large in relation to the internal cash accruals of most of the suppliers. This move will drive up debt for most of the suppliers, though some part of this could also be funded by way of fresh equity.
Key issues. At present the macroeconomic scenario points towards a slowdown in the domestic automobile sales over the near term, which could impact the revenues for suppliers like Gabriel India. There is also the threat from changing global trade agreements including specific bilateral and regional trade agreements that calls for seamless trade amongst signatory nations. Such agreements can adversely impact the Indian auto suppliers with increased competition. OEMs would benefit once duty anomalies vanish making it hard for local component makers.

Strengths
Technical collaborations: GIL has longstanding technical tie-ups with global players, which include US-based Arvin Meritor for commercial vehicles and Yamaha Motor Hydraulic System for two-wheelers. It also has technical collaboration with KYB Corporation, Japan and KYBSE, Spain for four-wheelers and two-wheelers. As shock absorbers are safety-critical products, these technical tie-ups with international majors enhance the company's product development capabilities. GIL also entered into an agreement with HPCL to market co-branded front fork oil through its after-market network.
Diverse client base: GIL is a supplier across all the segments in the industry-two-wheelers, three-wheelers, four-wheelers, passenger cars and commercial vehicle. Moreover, it has a wide range of products that it supplies to these segments which is a good de-risking measure despite everything ultimately falling in line with the sector's future. By working with auto-makers in India and abroad it has the distinctive advantage of geographical diversity when dealing with some of the leading auto makers such as Maruti Suzuki, Honda, Hyundai, Tata Motors, TVS, Bajaj Auto and Ford.
Niche Player: GIL is also the sole supplier to the sports utility vehicle (SUV) segment. SUVs such as Tata Aria, Tata Safari and Mahindra XUV500 besides motorcycle major Royal Enfield exclusively source from GIL.

Concerns
One of the biggest posers for the company is the volatility in raw material prices which only compounds with fluctuating foreign currency. As a net importer of components and material, the company faces competition from several unorganised players.
Peer comparison: Peers such as Bosch, Motherson Sumi System and Amtek Auto are way ahead when compared with GIL on operating profit margin and net profit margin. Where Gabriel can find comfort is return on equity where it scores over Bosch and Amtek Auto but is way behind Motherson Sumi System.

Growth and Opportunities
The company plans to invest around Rs 30 crore over the next three years in various research and development activities to upgrade its existing skills and capabilities and to develop new products and processes. It recently was awarded a new order by Honda Motorcycles and the management expects the sales accruals from this order to start trickling in from 2013. Its order book for the coming year stands at around Rs 300 crore.

Financials
The company posted sales of over Rs 800 crore in FY11, with the OE sales contributing the most to Gabriel's sales growth; a trend that is expected to continue. Over the past ten years the company posted a healthy income growth of 15.3 per cent and 25.8 per growth in profit after tax. Over these years, the company has paid an average of 40 per cent of earnings as dividends to shareholders. And, in the last three years, the company has managed to reduce its debt-to-equity ratio which is currently 0.8. The return on capital employed posted a five-year median of 17.4 per cent and return on net worth registered a five-year median 17.1 per cent.

Valuations
The stock is currently trading at a price-to-earnings (PE) ratio of 5.39 which is at a discount of 50 per cent to its five-year median PE of 10.8. However, in terms of its price-to-book value (P/B) ratio, the stock is trading at a premium of 3.5 per cent to its five year median P/B of 1.44. The earnings per share (EPS) over the past five years has been 38.7 per cent CAGR and the price-to-earnings to growth (PEG) ratio is an attractive 0.1. The stock is fairly valued in terms of its PE and PEG ratios but one should factor in the cyclical nature of the auto industry before investing.