Setco Automotive reported quarterly earnings that were in line with revenue estimates but below profit estimates. Revenue grew 49% year-over-year to INR 954 million driven by a rise in OE and replacement sales. However, margins declined slightly due to higher material costs from rupee depreciation and commodity price increases. While the company expects demand growth in the auto sector, forecasts for profits are below previous estimates due to the lower than expected quarterly result. The report maintains a 'buy' recommendation based on growth opportunities in the commercial vehicle market.

1. 1
Setco Automotive
Sensex: 25908 CMP:INR134 Target: INR 159
Auto Ancillaries
OE sales up 23.2%, replacement sales up 74.5%
OE sales grew 23.2% YoY to INR 301 mn whereas aftermarket sales
grew by 74.5% YoY to INR 601 mn. Replacement market has been
on upward trajectory from Q2FY14 primarily because of
replacement demand for the BS III compliant clutches that were
fitted in CVs in 2010. Exports grew by only 4% but we expect
significant pick up in exports from H2 onwards. We expect OE &
replacement market volumes to grow at a CAGR of 16.7% & 15.4%
respectively between FY14-16E.
EBITDA Margin down 12 bps YoY
Setco reported EBITDA of INR 112 mn, up 47.8% YoY but margins
dipped 12 bps over the same period to 11.8% led by higher material
costs. Material cost increased because of rupee depreciation
(Imports account for ~25% of raw material cost) & increase in
price of certain raw materials including steel. Setco is in talks
with OEMs for price hike & management expects some decision
on pricing front by the end of next month. Employee cost & other
expenses came in at INR 82 mn (8.6% of sales) & INR 180 mn
(18.8% of sales).
Other Highlights
1. Volumes for Clutch Driven Plate & Clutch Cover Assembly grew
by 50.0% & 28.0% YoY respectively.
2. The company plans to incur capex of INR 250 mn in both FY15
& FY16 on normal maintainence & backward integration of
some parts.
August 06, 2014 RESULTUPDATE-Q1FY15
3. Total Debt currently stands at INR 1850 mn & Setco plans to
repay INR 320 mn of debt over the next two years.
4. In order to improve its product quality, Setco, has entered into
a JV with Lingotes Especiales S.A to manufacture high quality
machined ferrous casting products for itself. The company
intends to invest INR 360 mn over the next two years in the JV.
Outlook & Valuation
We expect M&HCV segment to recover & register a CAGR of 16.7%
betweenFY14-16E.GlobalplayerslikeDaimler&Volvohavestarted
manufacturing operations in India with the twin objective of
increasing the domestic presence & making India an export base
for overseas markets. To offer superior quality products at
competitive price, these MNCs would increase insourcing &
localization of auto parts, thereby generating demand for Setco's
clutches. Dependency on M&HCV segment, increased in-sourcing
by MNCs and sizeable market share of ~85% places Setco
Automotive in a sweet spot.
WeexpectSetco'svolumetoregisteraCAGRof16.0%betweenFY14-
16Ewhereasrevenue&PATareexpectedtoclockinaCAGRof19.1%
&132.1%respectivelyoverthesameperiod.EBITDAmarginislikely
to increase by 600 bps to 15.7% between FY14-16E on the back of
pricehikes,lowerdiscounts&benefitsofoperatingleverage.Setco,
being a pure M&HCV auto ancillary, is among the best play of any
recoveryintheCVcycle.WeretainourBUYrecommendationonthe
stock with a target price of INR 159 based on 6.5x FY16E EBITDA.
Shareholding (%) Jun-14
Promoters 63.01
FIIs 21.1
DIIs 0.03
Others 15.86
Relative Price Performance
Key Data
BSE Code 505075
Bloomberg Code SETC IN
Reuters Code SETC.BO
Shares Outstanding (mn) 26.68
Face Value 10
Mcap (INR bn) 3.57
52 Week H/L 141.10/61.95
2W Avg. Vol, BSE 0
Float (INR bn) 1.32
Beta 0.16
(INR mn) FY13 FY14 FY15E FY16E
Net Sales 3994 3899 4508 5532
Growth (%) -7.66 -2.37 15.62 22.70
EBIDTAM (%) 14.18 9.68 12.36 15.69
Adj. PAT 252 106 250 569
Growth (%) 6.30 2.71 5.55 10.29
Adj. EPS (INR) 9.43 3.96 9.37 21.33
P/E(x) 10.60 22.17 14.30 6.28
EV/EBIDTA 7.71 10.96 9.45 5.75
Net Debt/Equity 0.94 0.95 0.82 0.57
RoACE (%) 13.72 10.28 13.48 19.73
RoAE (%) 13.96 5.57 12.19 22.79
Setco Automotive reported Q1FY15 revenue at INR 954 mn which was inline with our estimates but PAT, which came
in at INR 45 mn was below our estimates. EBITDA was up 47.8% at INR 112 mn but margins declined 12 bps YoY
to 11.8%. PAT grew by 9.2% to INR 45 mn due to lower other income (PBT excluding other income was up 4.9x YoY).
We retain our BUY recommendation on the stock with a target price of INR 159 based on 6.5x FY16E EBITDA.
Prashant Biyani
prashant.biyani@spagroupindia.com
Ph. No. 91 33 4011 4800 (Ext. 833)
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Setco Sensex

2. 2
Auto Ancillaries
Quarterly Financials
Particulars (INR Mn) Q1FY15 Q1FY14 YoY% Q4FY14 QoQ%
Net Sales 954 639 49.37% 1094 -12.76%
Other Income 21 45 -54.63% 73 -71.63%
Total Income 975 684 42.47% 1166 -16.43%
Raw Material Consumed 568 372 52.72% 645 -11.98%
Stock Adjustment 12 -6 NA 56 -78.85%
Employee Expenses 82 65 27.20% 72 14.94%
Other Expenses 180 133 35.70% 225 -20.09%
Total Expenses 842 563 49.58% 998 -15.61%
EBITDA 112 76 47.83% 96 16.88%
Depreciation 30 24 25.74% 30 0.00%
EBIT 82 52 57.85% 66 24.47%
Interest 50 46 8.79% 54 -8.67%
PBT 54 52 2.69% 85 -36.76%
Tax Expense 9 11 -22.02% -3 NA
PAT 45 41 9.22% 88 -48.86%
Extra-ordinary Items 0 0 NA 57 NA
APAT 45 41 9.22% 31 47.06%
Eq Cap (INR Mn) 267 267 0.00% 267 0.00%
FV 10 10 0.00% 10 0.00%
EPS 1.69 1.54 9.22% 1.15 47.06%
EBITDAM (%) 11.76% 11.88% (12 bps) 8.78% 298 bps
OPM (%) 13.92% 18.99% (507 bps) 15.41% (150 bps)
PATM (%) 4.72% 6.45% (173 bps) 2.80% (192 bps)

3. 3
Financials
Income Statement
Year End March (INR mn) FY13 FY14 FY15E FY16E
Net Sales 3994 3899 4508 5532
Growth in Sales (%) -7.66 -2.37 15.62 22.70
Cost of goods sold 2220 2187 2509 3051
Employees Cost 463 522 563 620
Other Expenses 696 766 825 927
Total Expenditure 3427 3522 3951 4664
EBIDTA (without OI) 567 377 557 868
% Growth -21.69 -33.36 47.60 55.74
EBITDA Margin % 14.18 9.68 12.36 15.69
Depreciation/Amortization 123 136 151 165
EBIT 443 242 406 703
EBIT Margin % 11.10 6.20 9.00 12.71
Interest Expense 198 234 234 215
Other Income 49 171 100 130
EBT 295 179 272 619
PAT 252 182 250 569
Exceptionals 0 77 0 0
APAT 252 106 250 569
% Growth -46.14 -58.05 136.80 127.58
APAT Margin % 6.30 2.71 5.55 10.29
Balance Sheet
Year End March (INR mn) FY13 FY14 FY15E FY16E
Sources of funds
Share capital 267 267 267 267
Reserves & Surplus 1537 1628 1785 2230
Total Networth 1803 1895 2052 2497
Total Debt 1726 1850 1750 1550
Total Liabilities 3530 3745 3802 4047
Application of funds
Net Block 1469 1577 1606 1691
Capital Work-in-Progress 40 0 70 70
Investments 368 513 813 873
Total Current Assets 2320 2157 2076 2352
Total Current Liabilities 601 741 752 858
Net Current Assets 1720 1415 1323 1494
Net Deferred Tax Asset (66) (73) (81) (91)
Other Assets 0 312 70 10
Total Assets 3530 3745 3802 4047
Cash Flow
Year End March (INR mn) FY13 FY14 FY15E FY16E
EBT 295 179 272 619
Less: Other Income/Exceptionals (49) (171) (100) (130)
Add:Depreciation 123 136 151 165
Add: Interest paid 198 234 234 215
Direct taxes paid (33) 11 (14) (49)
Change in Working Capital (276) 342 73 (130)
Cash Flow from operations (a) 257 730 616 688
Change in Fixed Assets (563) (244) (180) (250)
Change in CWIP 79 40 (70) 0
Change in Investments (150) (146) (300) (60)
Others 0 (312) 242 61
Cash Flow from Investing (b) (634) (662) (308) (249)
Change in Equity 3 0 0 0
Change in Debt 300 124 (100) (200)
Dividend paid (82) (82) (93) (124)
Interest paid (198) (234) (234) (215)
Others 293 149 124 181
Cash Flow from Financing (c ) 316 (43) (303) (358)
Net Change in Cash (a+b+c) (61) 25 6 81
Opening Cash 88 28 53 58
Closing Cash 28 53 58 139
Key Ratios
Year End March FY13 FY14 FY15E FY16E
Per Share Data (INR)
Reported EPS 9.44 6.83 9.37 21.33
Adj. EPS 9.43 3.96 9.37 21.33
Growth (%) -46.14 -58.05 136.80 127.58
CEPS 14.05 9.05 15.05 27.50
DPS 2.65 2.65 3.00 4.00
BVPS 67.62 71.01 76.90 93.58
Return Ratios (%)
RoACE 13.72 10.28 13.48 19.73
RoANW 13.96 5.57 12.19 22.79
Liquidity Ratios
Net Debt/Equity 0.94 0.95 0.82 0.57
Interest Coverage Ratio 2.25 1.03 1.73 3.28
Current Ratio 3.86 2.91 2.76 2.74
Efficiency Ratios
Asset Turnover Ratio 1.27 1.07 1.19 1.41
Inventory Days 157 190 154 115
Debtor Days 77 70 62 56
Creditor Days 61 67 68 54
Valuation Ratios
P/E(x) 10.60 22.17 14.30 6.28
P/BV (x) 1.48 1.24 1.14 0.94
P/CEPS (x) 7.12 9.69 5.83 3.19
Dividend Yield (%) 2.65 3.02 3.42 4.56
EV/Net Sales (x) 1.09 1.06 1.17 0.90
EV/EBIDTA(x) 7.71 10.96 9.45 5.75
Auto Ancillaries

4. 4
Auto Ancillaries
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