Talbros Automotive Components Limited: This Automotive Stock Should Fuel Your Portfolio As Market Slides

Diversified product suite and large customer base should continue to act as principal growth enablers. Gaskets business should continue to be largest revenue contributor, with Forging business to remain second largest. In FY20, OEMs made 70% of the company’s revenue, while exports made 14%.

About Talbros Automotive Components Limited

Talbros Automotive Components Limited was established in year 1956 and is being counted as one of India’s leading manufacturer of automotive components. The company has well-established presence. For 6+ decades, the company was able to add value for its clients as its focus was on unmatched quality and superior technology. Products of the company include gaskets, heat shields, forgings, chassis systems, suspension systems, anti-vibration components and hoses. The company has a diversified product basket and it caters to several automobile segments such as passenger vehicles, commercial vehicles, two- wheelers, three-wheelers, Agri, off-loaders and industrial etc. Strategic alliances with renowned global companies supported the company to deliver best-in-class auto components to customers.

Growth Enablers of Talbros Automotive Components Limited:

• Focus on Improving Margin Profile: FY21 was a challenging one for industry. Hedged approach to business for multi products, multi segment and its reach in domestic and exports market supported the company financially. The company saw orders from domestic and international OEMs flowing in. This exhibited strong product strategy and execution capabilities which the company built. Despite increasing commodity prices, consistent efforts in improving efficiency in operations improved margin profile. The company has strong experience in exports, and it has technological partnerships and marquee client names in its portfolio. All these factors should continue to stem growth and profitability. Marelli Talbros Chassis Systems Pvt. Ltd. JV company got a multi-year order from large European car manufacturer. This order focuses on supplying BIW parts and order supplies will begin in 1Q22 from plant in Pune, Maharashtra. Annual order value has been estimated at INR14.4 crores. Over life of contract, order value is estimated at ~INR92 crores. Because JV company has sufficient capacity, no large investments will be required to fulfil this order. Addition of this order to the company’s portfolio should result in improved revenues and should lead to operating leverage benefits because it needs low-level of capex. The company thinks export opportunities for Indian auto components industry should continue to persist and positive environment for specialized manufacturers will continue.

• Strong Global Partnerships Should Stem Growth: Talbros Automotive Components Limited has strong global partnerships and these partnerships should continue to supplement growth.

Ø  Nippon Leakless Talbros Pvt Ltd: Nippon Leakless Corporation is being counted amongst largest global manufacturers of gaskets and is a big supplier for Honda. Talbros has a share of 40% and sales are 100% being made to OEMs to Honda and Hero.

Ø  Marelli Talbros Chassis Systems Pvt Ltd: Magneti Marelli S.p.a is a fiat group company having annual revenue of €6+ billion and is a 50:50 partnership company which started production in Apr 2012. Its 100% sales are being made to OEMs and important customers include Maruti Suzuki India, Jaguar Land Rover, Suzuki Motors Ltd, Magna Steyr Fahrzeugtechn and Bajaj Auto.

Ø  Talbros Marugo Rubber Pvt Ltd: Marugo Rubber Industries Ltd is a global leader in supply of anti-vibration product and hoses. Top customers include Maruti Suzuki, QH Talbros, Daimler India Commercial Vehicle Pvt Ltd, Tamil Nadu and Suzuki Motors Gujarat Pvt Ltd. 

• Focus on Export Market and Product Development: FY20 was a challenging year as there was nationwide lockdown which impacted performance. Consolidated total income from operations was INR385.29 crores in FY20. Profit before exceptional items was INR13.52 crores, while PAT was INR12.19 crores. The company was focused on making operations stronger and enlarging its footprint globally through innovative solutions and strong manufacturing capabilities. The company saw orders of USD31 million across forging, gaskets and one JV company for domestic and export markets. Results were somewhat supported by efforts focused on growing export market, product development and testing with global auto majors. The company is expected to seek support from global synergies and wide geographical footprint. The company should be able to capitalize on opportunities coming because of new regulations and focus is on providing future-oriented products to esteemed customers. The company caters exports to USA, UK, Europe and Japan. New orders provide a huge validation of the company’s technical capabilities and open doors for several new customers. In these uncertain times, orders are expected to hugely benefit brand equity of Talbros Group. The company expects that these orders clearly provide long-term visibility and positive environment. The company continues to maintain focus on exports and on technical validation of its products. In its gasket business, the company is totally BS-VI ready. The company focuses a lot on technology to help localize a lot of raw material imports. The company has made raw material sourcing agreements and these have resulted in savings in operational costs, reduction of raw material inventory and working capital investments.
• Semiconductor Chip Shortage Should Improve: Total income from operations amounted to INR151 crores in 3Q22, exhibiting 15% growth in comparison to INR132 crores revenue in 3Q21. It posted EBITDA of INR21 crores in 3Q22 against INR21 crores in 3Q21, with EBITDA margin at 14% in 3Q22. There are expectations that semiconductor chip shortage could be improved going forward. This could result in improvement in its performance over upcoming quarters. The company continues to monitor commodity market and works with its customers on recovery front. With reduction in steel price pressure, the company’s margin profile is likely to improve in tendem with its revenue growth.
• Capitalising on Industry Dynamics: Indian automobile industry is being counted as one of driving forces of this economy, making up ~49% of India’s manufacturing GDP. Since this sector is deeply integrated with several other industrial sectors, it provides a boost to employment, exports and FDI inflows. India is a house of cost-effective operations, efficient manpower and is being considered as a fast-growing dynamic market. Country has emerged as core destination for several multinational automobile companies. Indian automobile industry faced challenges in FY20 and saw a brunt of lockdown. Operations of automobile companies were impacted, resulting in unutilized capacities and production cuts. Automotive industry has a solid and healthy base which should result in quick recovery. Revival is likely to stem from entirely new platforms available as a result of implementation of BS-VI norms. Apart from this, assured income to farmers and rapid urbanization should push vehicle demand. Demand for low emission and fuel-efficient vehicles should enable building of strong ecosystem for electric vehicles.

Conclusion

Growth of automobile industry should provide a base for growth in auto component industry. Good monsoons across India should propel rural demand which should supplement industry growth. Reduction in interest rates and steep discounts to liquid BS-IV inventory and to supply BS-VI should lend some support. Strict emission and safety standards and focus on digital tools in vehicles should make electric vehicles, connected cars and autonomous vehicles a key focus. Auto industry in India should seek support from aspirations of growing middle-class segment. Electrification saw positive business environment in India. Factors including falling prices of batteries and government’s supportive policies should be able to stimulate segment’s growth. Reduction in emission and less dependency on oil imports are some clear advantages of electrification.

Transportation sector saw several government initiatives in its favour, which should help automobile industry as there can be increase in demand for commercial vehicles. Recent government initiatives should provide needed support to automotive industry. Increase in basic custom duty by government on EVs for complete built ups, semi knock down and completely knock down vehicles in commercial and passenger segment should help promote domestic manufacturing and check electric vehicles imports. Government formulated partial credit guarantee scheme for NBFCs and this can result in improving liquidity and uptake of loans for commercial vehicle. It has abolished custom duty on lithium-ion battery cells import to promote manufacturing of battery packs locally. The company is expected to see highest contribution from its gaskets business to its revenues from operations. In FY20, this business made a contribution of ~63.49%. The company has strong competencies to provide innovative gasket solutions to its customers and these stem from advanced technology and modernised manufacturing facilities.

The company focuses on capturing newer markets and is dedicated on OE contracts with exports. Talbros Automotive Components Limited continues to work on heat shield gaskets, which is future for automobiles and the company has made good inductions into global OEMs. The company should be able to move ahead in this business and support is likely to come from strong order book and relationship with customers.

Forgings business should remain second best contributor to revenues from operations. In FY20, forgings made up ~31.66%.

Stock of Talbros Automotive Components Limited delivered multi-bagger returns between May 17, 2021- May 13, 2022 as it has seen a run up of ~108.9%.

Various government initiatives and its diversified product suite should continue to support growth in stock price. In comparison, Nifty Auto saw an increase of only ~4.1%. An amount of INR1,00,000 invested in Talbros Automotive Components Limited on May 17, 2021 would have turned into ~INR 2,08,916.18 on May 13, 2022. To recover from slowdown resulted from COVID-19, the company is focussed on securing supplies, manufacturing and logistics for growth.

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