How much heat is left in Precision Camshafts Ltd?

Enforcement of BS-VI standards, government’s policy support and cost-effective manufacturing base are some factors which should support automotive industry and Precision Camshafts Ltd is likely to gain. Healthy market position in passenger vehicle camshafts and stable financial risk profile are some of factors which should act as principal growth enablers.

Precision Camshafts Ltd

About the company

Since incorporation in 1992, Precision Camshafts Ltd emerged as a market leader in camshaft manufacturing. The company maintains a comprehensive quality management system, aligned with world-class production practices and an adherence to constant state of improvement. The company is at forefront of automotive components business. It manufactures all types of camshafts under one roof. The company has its headquarters in Solapur, Maharashtra, and 2 plants are situated in Solapur (India) (4 foundries and 4 machine shops), 2 plants are situated in Nashik (India), 1 plant in Cunewalde (Germany) and 1 plant is situated in Oosterhout (Netherlands). Customer base of the company spans across 17 countries.

Group companies comprise Memco Engineering Pvt. Ltd., MFT Motoren und Fahrzeugtechnik GmbH and Emoss Mobile Systems B.V.

Product portfolio

The company has a diverse product line such as variety of camshafts, balancer shafts, injector components and other automotive and non-automotive components. These are suited to cater to requirements of OEM’s. It is a leading player in electric mobility market by supplying end-to-end electric drivelines for heavy equipment and vehicles.

Business model of Precision Camshafts Ltd

Precision Camshafts Ltd manufactures premium quality camshafts, which is an important engine component in India since 1992. The company has been categorised as an only supplier in world offering all camshafts technologies under 1 roof. The company is equipped with technological capabilities in manufacturing cast iron, ductile iron, hybrid and assembled camshaft. Apart from this, the company is also a significant supplier of vital injector components, balancer shafts and other speciality prismatic parts, and complete electric drive lines to leading Original Equipment Manufacturers (or OEMs) and end-customers.

Financial performance of Precision Camshafts Ltd

On consolidated basis, total revenue of the company came in at INR91,142.34 lakhs against INR73,204.42 lakhs in prior year. Its PAT for FY22 was INR4,602.29 lakhs against loss of INR77.85 lakhs in previous year. The company saw an increase in revenue by 24.50% year over year in FY22. For MEMCO, Nashik, the company stated that because of pent-up demand in CV market, the company saw continuous demand. Business was able to generate solid top-line and bottom-line results, maintaining consistency in growth just like previous quarters. Speaking of FY23, the company continues to concentrate on gaining new clients to achieve better and stronger business expansion.

In MFT, Germany, the company facilitated commercial stabilisation in challenging environment. However, Russia-Ukraine conflict has been a critical concern for the company’s expansion plans for European market. To mitigate this, the company continues to focus on expanding business of non-engine component range.

Future strategies

The company continues to develop an electric driveline for a sub-4-ton LCV for Indian market. There are more than 2 million such LCV’s currently plying on Indian roads having approximately half a million new ones added annually for various applications such as last-mile delivery, waste collection, and postal services, etc. Focus is on bringing premium quality reliable products to Indian market combined with cost competitiveness & high localisation. The company is in process of setting up its first EV plant in Solapur and has signed agreements with large customers.

With focus on enhancing industrial and geographical presence, the company continues to emphasise on improving and widening offerings. By 2025, it expects that 20%-25% business will come from its non-camshaft business. Using its existing facilities of foundries and machining units, the company is ready to diversify its product portfolio and expand into newer geographies, serving more customers.

The company was able to develop India’s first mid-size retrofitted E-Bus with help of EMOSS technology. It now focuses on becoming a competitive solution provider for small e-LCVs. Going ahead, Precision Camshafts Ltd will look to become sustainable, remaining focused on EV business in Europe and expanding its business in India.

In this dynamic business environment, automotive camshafts market should be able to experience incremental growth moving forward. Strategic business plan has been aligned to its focus on non-camshafts business and the company plans to capture a large market share in EV. Therefore, significant growth opportunities are available for the company.

Industry dynamics

As of FY21, auto ancillary market made ~2.3% share of India’s GDP and employed more than 5.5 million people. Auto ancillary market in India was valued at INR3,615.78 Bn in FY21 and is expected to reach INR7756.98 Bn by FY27, compounding at ~15.35% during FY22- FY27 forecast period. Factors including increased exports, technological advancements in automobile sector, higher preference for EVs, and favourable government initiatives should support growth momentum.

Camshafts continue to play an important role in improving fundamental functioning of an engine. Camshafts are used in both modern-day overheadcam (OCH) engines and older engines. There is a significant rise in number of commercial vehicles, mainly in Asia Pacific region. Therefore, demand should be augmented for automotive camshafts.

Future seems bright for camshaft industrialists because of changing demands after COVID-19 pandemic and constant innovations and developments in this field.

Despite being a preferred supplier in auto component industry, India faces competition from peers Asian countries such as China, Vietnam, Indonesia, Thailand and Taiwan. Indian automotive manufacturers were successful across segments in local market as population becomes more and more upwardly mobile. Globally, India’s automotive industry seems to be at forefront of many segments. By volumes, it has been positioned as number 1 in two-wheelers, segment A cars and tractors. Apart from this, country is renowned as a global hub for frugal and scalable engineering. India has been categorised as an attractive investment destination and many manufacturers suggest “manufacturing” as nature of business activity they are planning in India. Therefore, India’s automotive and auto component industry should be able to display its resilience and capabilities on global stage.

Indian automotive OEM industry seems to be in a strong position. Industry targets to nearly triple its vehicle sales by 2026, from 26 million to 65 million to 76 million vehicles, across segments. These could be supporting factors for Indian automotive components industry, which has its ambitions of its own by 2026—to double contribution to manufacturing GDP with 4-fold growth in size and 6-fold growth in exports.

Shareholding pattern of Precision Camshafts Ltd

As per recent shareholding pattern released by the company, its promoters hold 65.37%, with remaining 34.59% being held by general public. Among promoters, highest ownership (~39.78%) stands in name of Yatin Subhash Shah and Cams Technology Limited holds 14.22%. It seems that insiders continue to own more than half of Precision Camshafts Limited, giving them a lot of power.

Interestingly, Suhasini Yatin Shah is third largest shareholder who owns 11.35% in Precision Camshafts Ltd.

Risk factors

Shifting market dynamics, semi-conductor shortage, increase in commodity prices and high and non-uniform tax rates are some challenges faced by Precision Camshafts Ltd. Automotive industry is challenged by constant shift in market dynamics because of changing manufacturing locales, customer demands, operating models and priorities.

Because of geopolitical tensions, OEMs across automobile industry are facing challenges of high raw material prices. Prices of aluminium and steel saw a steep increase during 1H22 which consequently led OEMs to increase prices of their vehicles. According to a recent research, auto component industry continues to face several headwinds in form of shortage of semi-conductors because of current geopolitical tensions. Such factors are impacting operating margins of OEMs.

Valuation

Stock of Precision Camshafts Ltd currently trades at ~32.2x of FY22 EPS, which is at a deep discount as compared to sectoral average of ~40.54x. The company has significant potential to grow given its de-risked business model, market leadership, global footprint, India’s growing automotive and components industry and latest technological solutions.

Investment rationale

The company continues to have a long track record of more than 25 years in manufacturing critical engine components, mainly camshafts, and has been able to establish strong business relationships with marquee global OEMs. Its customer profile is diversified given that it is operating in auto component industry selling largely to OEMs.

Top 5 customers of the company contributed ~38% of net sales of consolidated turnover in FY22. However, as a percentage of standalone net sales, it is concentrated at 55%. Moreover, majority of clients are associated with the company for more than 10 years, exhibiting that the company can get repeated orders. Some key customers include Ford Motors Company, Volkswagen, GM, Bosch, etc.

The company is present in over 17 countries including Europe, UK, China, Brazil, Russia and North America, etc. Along with the company’s camshaft penetration in global market, it has expanded its geographic presence through several inorganic growth by acquisitions. Presence in various international markets should help the company in reducing exposure of any adverse economic slowdown in any single geography.

The company has gained strong foothold in domestic market. Products of the company meet ~70% of domestic market’s requirements and 9-10% of global passenger vehicle camshaft requirements.

Stock of the company currently trades at ~23x FY22 EPS, which is at a deep discount to sectoral average of ~31.54x. Therefore, investors should consider going long on this stock.

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