We recommend an Accumulate rating on the stock with long-term perspective
Denso India Limited (CMP: Rs 89)
Denso India Limited is a subsidiary of Denso Corporation of Japan. Denso Corp Japan (DC) is a US$ 27 bn global auto component giant operating in more than 30 countries. Denso India (DI) manufactures alternators, motors (starters, wiper, fan, blower), CDIs and magnetos at its plant located in Uttar Pradesh. Denso Corp holds 48% in DI, Maruti Udyog and Sumitomo Corp hold 10% each, while 5% is held by Asmo Company Japan.
Denso India supplies its products mainly to domestic OEMs in the four- and two-wheeler segments. It derives 60% of its revenues from the four-wheeler segment, while the balance comes from two-wheelers. DI's major customers in the four-wheeler segment include Maruti Udyog and Toyota. Globally, it derives close to 50% sales from Toyota and 3-5% from Suzuki. In the two-wheeler segment, it mainly caters to Hero Honda and Honda Motorcycles & Scooters, India. Overall, DI derives 75-80% of its sales from Maruti and Hero Honda. Both these companies have chalked out ambitious cap-ex plans to increase their production capacities. The increase in their production will result in higher sales for DI, assuming their strong business relations built over the years in India and globally.
Denso's balance sheet has virtually no debt. With a gearing ratio of 0.05x the company has tremendous opportunity to scale up by leveraging. On the operating front, the company has maintained its margins and has not suffered any major erosion even in the era of high raw material prices. Low gearing and strong cash flows has enabled the company to pay dividend consistently for last several years.
Among DC's markets (ex-Japan), Asia-Oceania is the most lucrative with margins as high as that in Japan. With high contribution from Asia-Oceania, the company is focusing to increase its presence in these markets with newer products through transfer of technology. This move will enable DI to gain further ground with its customers by supplying latest products.
India and Japan are working on a comprehensive economic co-operation agreement. The agreement is expected to conclude by end of 2006. As a result, the bilateral trade between the two countries, which stands current at US$ 5.5 bn, is expected to double over the next three years. Further, India is being increasingly looked by Japan as a low cost manufacturing base. The Suzuki- Nissan deal to manufacture small cars of Nissan at Maruti's plant clearly displays the initiative towards a large game plan. We believe these developments would work in favour of companies such as Denso India, because it has established relationship with its customers such as Maruti and Hero Honda, and their parent companies have global relationships.
Net Sales moved up to Rs 95 Cr in Q1FY07 from Rs 82 Cr, showing a YoY growth of 16% for the quarter. This was aided by higher volume growth due to buoyancy in overall automobile sector. Net Profit moved up to Rs 3.6 Cr in Q1FY07 from Rs 2.5 Cr, showing a growth of 47% for the quarter. Sequentially, it fell from Rs 8.6 Cr to Rs 3.6 Cr in Q1FY07. OPM stood at 7.9% in Q1, compared to 7.7% in Q1FY06. EPS for the quarter stood at 1.3. Q1 has been a relatively subdued quarter for the company. Therefore, the earnings are expected to increase in the next 3 quarters, with demand picking up from Auto majors during festival season.
The demand for four-wheelers and two-wheelers is expected to continue to show upward trend. However, as the competition among the OEMs intensifies, the pricing of the products of Denso India will be under pressure. Therefore, to offset this, the company needs to pursue aggressive cost control activities.
Denso India Limited is a subsidiary of Denso Corporation of Japan. Denso India supplies alternators, motors (starters, wiper, fan, blower), CDIs and magnetos mainly to Maruti Udyog and Hero Honda. DI is expected to benefit from capacity expansion plans of Maruti and Hero Honda. The ongoing efforts of increasing the customer base along with introduction of new products by OEMs is expected to help the Company in maintaining revenue growth momentum. Also the developments on economic co-operation front between India and Japan is expected to benefit companies such as DI, which have established relations with Indian auto major with parents based in Japan.
At the current market price of Rs 89, the stock trades at 13x its FY07E earnings of Rs 7, which is fairly priced. The company is virtually zero debt with book value of Rs 50 for FY06. We believe that the company's long-term growth prospects are sound.
We recommend an Accumulate rating on the stock with long-term perspective.
Denso India Limited is a subsidiary of Denso Corporation of Japan. Denso Corp Japan (DC) is a US$ 27 bn global auto component giant operating in more than 30 countries. Denso India (DI) manufactures alternators, motors (starters, wiper, fan, blower), CDIs and magnetos at its plant located in Uttar Pradesh. Denso Corp holds 48% in DI, Maruti Udyog and Sumitomo Corp hold 10% each, while 5% is held by Asmo Company Japan.
Denso India supplies its products mainly to domestic OEMs in the four- and two-wheeler segments. It derives 60% of its revenues from the four-wheeler segment, while the balance comes from two-wheelers. DI's major customers in the four-wheeler segment include Maruti Udyog and Toyota. Globally, it derives close to 50% sales from Toyota and 3-5% from Suzuki. In the two-wheeler segment, it mainly caters to Hero Honda and Honda Motorcycles & Scooters, India. Overall, DI derives 75-80% of its sales from Maruti and Hero Honda. Both these companies have chalked out ambitious cap-ex plans to increase their production capacities. The increase in their production will result in higher sales for DI, assuming their strong business relations built over the years in India and globally.
Denso's balance sheet has virtually no debt. With a gearing ratio of 0.05x the company has tremendous opportunity to scale up by leveraging. On the operating front, the company has maintained its margins and has not suffered any major erosion even in the era of high raw material prices. Low gearing and strong cash flows has enabled the company to pay dividend consistently for last several years.
Among DC's markets (ex-Japan), Asia-Oceania is the most lucrative with margins as high as that in Japan. With high contribution from Asia-Oceania, the company is focusing to increase its presence in these markets with newer products through transfer of technology. This move will enable DI to gain further ground with its customers by supplying latest products.
India and Japan are working on a comprehensive economic co-operation agreement. The agreement is expected to conclude by end of 2006. As a result, the bilateral trade between the two countries, which stands current at US$ 5.5 bn, is expected to double over the next three years. Further, India is being increasingly looked by Japan as a low cost manufacturing base. The Suzuki- Nissan deal to manufacture small cars of Nissan at Maruti's plant clearly displays the initiative towards a large game plan. We believe these developments would work in favour of companies such as Denso India, because it has established relationship with its customers such as Maruti and Hero Honda, and their parent companies have global relationships.
Net Sales moved up to Rs 95 Cr in Q1FY07 from Rs 82 Cr, showing a YoY growth of 16% for the quarter. This was aided by higher volume growth due to buoyancy in overall automobile sector. Net Profit moved up to Rs 3.6 Cr in Q1FY07 from Rs 2.5 Cr, showing a growth of 47% for the quarter. Sequentially, it fell from Rs 8.6 Cr to Rs 3.6 Cr in Q1FY07. OPM stood at 7.9% in Q1, compared to 7.7% in Q1FY06. EPS for the quarter stood at 1.3. Q1 has been a relatively subdued quarter for the company. Therefore, the earnings are expected to increase in the next 3 quarters, with demand picking up from Auto majors during festival season.
The demand for four-wheelers and two-wheelers is expected to continue to show upward trend. However, as the competition among the OEMs intensifies, the pricing of the products of Denso India will be under pressure. Therefore, to offset this, the company needs to pursue aggressive cost control activities.
Denso India Limited is a subsidiary of Denso Corporation of Japan. Denso India supplies alternators, motors (starters, wiper, fan, blower), CDIs and magnetos mainly to Maruti Udyog and Hero Honda. DI is expected to benefit from capacity expansion plans of Maruti and Hero Honda. The ongoing efforts of increasing the customer base along with introduction of new products by OEMs is expected to help the Company in maintaining revenue growth momentum. Also the developments on economic co-operation front between India and Japan is expected to benefit companies such as DI, which have established relations with Indian auto major with parents based in Japan.
At the current market price of Rs 89, the stock trades at 13x its FY07E earnings of Rs 7, which is fairly priced. The company is virtually zero debt with book value of Rs 50 for FY06. We believe that the company's long-term growth prospects are sound.
We recommend an Accumulate rating on the stock with long-term perspective.
posted by Stock Market at
1:25 AM
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