Valuation trends in India - November 2020 - In the aftermath of Covid-19 and a broad auto cycle downturn.

1. Valuations Trends & Analysis
Auto Ancillary
November 2020

2. Recent trends and developments in the sector are as follows-
Auto Ancillary - Introduction
The Auto Ancillary industry contributed to ~2.3% of the Indian GDP in FY19. The auto-components industry expanded by a CAGR of 6% over
FY16 to FY20 to reach US$ 49.3 billion in FY20.
1
2 The Automobile Component Manufacturers Association (ACMA) in its Automotive Mission Plan 2026, has set a target turnover of US $ 200Bn in
revenues for the automotive components sector by 2026, backed by exports in the range of $ 70-80 Bn.
3 The Sector has identified electric vehicles as the opportunity for next phase of growth and has started allocating funds towards investments in the
said space.
4 Relatively lower cost of manufacture compared to its Europe counter parts, up to 100% FDI in the automotive manufacturing space, and the
announcement of the recent Production Linked Manufacturing Incentives by the Central Government remain key drivers for investments and
growth in this segment.
In our second edition of the VALUATION TRENDS AND ANALYSIS newsletter, we have attempted to dive into the AUTO ANCILLARY space in India to analyse
VALUATION TRENDS in the sector, as it recently grappled with cyclical downturn in the Automobile sector in FY20, cataclysed further by the adversities of
Covid 19.
We believe, the above factors have led and could further lead to sector-wide expansion in its valuation multiples, as showcased in our analysis hereafter.
For ease of understanding, we have tried to divide the sector into 7 categories –
i. Metallic & Tooling Components, ii. Tyres & Ancillary Products, iii. Lubricants, iv. Engine & Engine Parts,
v. Springs, Suspensions & Shock Absorbers, vi. Multiple Segments, vii. Others.
However, with the rise of certain green shoots for the sector in H1FY21 in the form of volume growth in certain categories of vehicles, margins rocketing to
multi-year highs and revenues returning to pre-covid levels for some firms, we believe, the sector is bound to spring some positive surprises in the near future.

3. Auto Ancillary – Metallic & Tooling Components
Metallic & Tooling Components consist of products like Bearings, Castings,
Fasteners, Forgings, Pistons & Other Metal Parts.
With revenues at pre-Covid levels coupled with margins touching 2 year Highs in
Q2FY21, this segment has weathered the storm in a relatively smooth manner
compared to some of its contemporaries.
VALUATION & PROFITABILITY
Average
EBITDA Margins
H2FY18 H1FY21
14.2%18.1%
18.2x16.0x
5.7%8.2%
34.5x34.8x
Average
EV/EBITDA
Average
PAT Margins
Average
P/E
Companies Considered –
Schaefller India, Bharat Forge, Kirloskar Ferrous,
Federal-Mogul Goetze, Mahindra CIE, Ramkrishna
Forgings, Ratnamani Metals, SKF India,
Sundaram Clayton, Timken India
16.0
12.0
12.0 11.4
10.1
18.2
34.8
26.8
24.2 23.4
25.9
34.5
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
H2FY18 H1FY19 H2FY19 H1FY20 H2FY20 TTM
EV/EBITDA Avg. EV/EBITDA Median P/E Avg. P/E Median
METALLIC & TOOLING COMPONENTS
P/E Median - 26.4x
EV/EBITDA Median - 12.0x
(x)
Multiples have sported a U Shaped recovery on account of
improvement in commodity prices, cyclical upturn expected from
H2FY21 and economic recovery after Covid-19 adversity.

4. Auto Ancillary – Tyres & Allied Products Segment
The Industry is largely dominated by MRF Tyres, Apollo Tyres and CEAT Tyres,
catering to ~29%, ~29% and ~13% market share in India respectively.
Pent-up demand, fall in prices of key raw materials like rubber, carbon black and
textiles have lead to significant recovery in margins in Q2FY21. While effects of pent-
up demand might dilute in the upcoming quarters, other factors coupled with cost
optimisations as per management commentaries are here to stay, leading to sustained
margin improvement in the coming years.
VALUATION & PROFITABILITY
Average
EBITDA Margins
H2FY18 H1FY21
16.8%17.5%
10.3x10.9x
6.1%8.2%
27.7x24.6x
Average
EV/EBITDA
Average
PAT Margins
Average
P/E
Companies Considered –
Apollo Tyres, Balkrishna Industries,
CEAT, GoodYear India,
MRF, TVS Srichakra
10.9
8.6
9.0 8.5
6.8
10.3
24.6
18.8
20.4
19.4
13.6
27.7
-
5.0
10.0
15.0
20.0
25.0
30.0
H2FY18 H1FY19 H2FY19 H1FY20 H2FY20 TTM
EV/EBITDA Avg. EV/EBITDA Median P/E Avg. P/E Median
TYRES & ALLIED
P/E Median - 19.9x
EV/EBITDA Median - 8.8x
(x)
Cyclical upturn, increased aftermarket share, sustainable
expansion of margins and economic recovery post Covid-19
have lead to an increase in TTM valuation multiples.

5. Auto Ancillary – Lubricants
Apart from the slowdown in the overall auto ancillary sector, the companies involved
in the Lubricants segment are affected by changes in the oil prices as well, making
their EV/EBITDA multiples more volatile compared to other auto-ancillary
contemporaries.
Lower oil prices in H1FY21 and revenues reaching to pre-Covid levels in Q2FY21
have helped the segment post significant recoveries amidst the aftermath of Covid-
19.
VALUATION & PROFITABILITY
Average
EBITDA Margins
H2FY18 H1FY21
20.0%22.5%
11.0x15.2x
12.4%13.9%
19.1x26.0x
Average
EV/EBITDA
Average
PAT Margins
Average
P/E
Companies Considered –
Castrol India,
Gulf Oil Lubricants,
Tide Water Oil Company
15.2
11.5
12.0
10.6
7.5
11.0
26.0
25.4
28.0
18.5
13.0
19.1
-
5.0
10.0
15.0
20.0
25.0
30.0
H2FY18 H1FY19 H2FY19 H1FY20 H2FY20 TTM
EV/EBITDA Avg. EV/EBITDA Median P/E Avg. P/E Median
LUBRICANTS
P/E Median - 22.2x
EV/EBITDA Median - 11.3x
(x)
Sustainability in margins and recovery in
revenues to pre-Covid levels have led to
significant expansion in multiples from
the lows of H2FY20.

6. Auto Ancillary – Engine & Engine Parts
The companies involved herein mainly cater to segments which have seen a faster
recovery in demand post Covid-19 adversities, namely – 2W, 3W and Agricultural
Vehicles. As the agricultural economy saw a major boom in the recent monsoon
season along with a rise in sowing of rabi crops, demand for Swaraj Engines (which
supplies engines for M&M’s Tractors) has seen significant recovery on a y-o-y basis
propelling its multiples to multiyear highs. However, rather surprisingly, Greaves
Cotton is yet to recover from the adversities of Covid-19 and continues to see stress in
its financials.
VALUATION & PROFITABILITY
Average
EBITDA Margins
H2FY18 H1FY21
13.9%16.9%
15.4x11.9x
8.5%10.8%
26.7x22.0x
Average
EV/EBITDA
Average
PAT Margins
Average
P/E
Companies Considered –
Greaves Cotton,
Swaraj Engines
11.9
9.9 10.1 10.8
7.3
15.4*
22.0
18.5
20.7 20.9
14.0
26.7*
-
5.0
10.0
15.0
20.0
25.0
30.0
H2FY18 H1FY19 H2FY19 H1FY20 H2FY20 TTM
EV/EBITDA Avg. EV/EBITDA Median P/E Avg. P/E Median
ENGINES & ENGINE PARTS
P/E Median – 20.8x
EV/EBITDA Median – 10.5x
(x)
* - H1FY21 numbers do not include Greaves Cotton since
the company has fared poorly with negative EBITDA % in
H1FY21 and is yet to recover from the Cyclical Upturn post
adversities of Covid-19

7. Auto Ancillary – Springs, Suspension, Shock Absorbers
Jamna Auto majorly caters to and is largely dependent on the Heavy Commercial
Vehicles (HCV) segment for its performance. Since the volumes in the HCV segment
are still far from pre-Covid levels, Jamna Auto is seeing a delayed recovery in its
financial performance and hence, has been excluded from our analysis herein.
Meanwhile, Gabriel India caters to all types of vehicles – 2W, 3W and 4W and hence
has showcased robust improvement in y-o-y profitability and revenues (at pre-Covid
levels) in Q2FY21, thereby achieving significant expansion in its valuation multiples.
VALUATION & PROFITABILITY
Average
EBITDA Margins
H2FY18 H1FY21
4.4%12.0%
13.8x11.7x
1.2%6.2%
30.1x22.9x
Average
EV/EBITDA
Average
PAT Margins
Average
P/E
Companies Considered –
Gabriel India,
Jamna Auto Industries
11.7
9.2
9.6
8.5
6.5
13.8*
22.9
17.4
20.1
17.9 14.4
30.1*
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
H2FY18 H1FY19 H2FY19 H1FY20 H2FY20 TTM
EV/EBITDA Avg. EV/EBITDA Median P/E Avg. P/E Median
SPRINGS, SUSPENSIONS, SHOCK ABSORBERS
P/E Median - 19.0x
EV/EBITDA Median - 9.4x
(x)
* - H1FY21 numbers do not include Jamna Auto since
the company, unlike Gabriel India, has fared poorly in
H1FY21 and has not yet to recovered to pre-Covid
levels even in Q2FY21.

8. Auto Ancillary – Multiple Segments
Companies included herein cater to multiple sectors in the Auto Ancillary space.
As has been the case with the overall sector, multiples have contracted gradually on
account of cyclical downturn coupled with Covid-19 up till H2FY20. Post which, rise
of operating margins and revenues to pre-Covid levels in Q2FY21 have lead to
significant recovery in the EV/EBITDA valuation multiples for the sector.
VALUATION & PROFITABILITY
Average
EBITDA Margins
H2FY18 H1FY21
11.3%13.3%
13.7x14.4x
0.0%6.2%
48.7x29.3x
Average
EV/EBITDA
Average
PAT Margins
Average
P/E
Companies Considered –
Suprajit Engineering, Motherson Sumi Systems, JBM
Auto, Varroc, Endurance Technologies, Minda
Industries and Sandhar Technologies
14.4 13.6
10.0
8.7
6.1
13.7
29.3 30.1
19.7
17.9
15.0
48.7
-
10.0
20.0
30.0
40.0
50.0
60.0
H2FY18 H1FY19 H2FY19 H1FY20 H2FY20 TTM
EV/EBITDA Avg. EV/EBITDA Median P/E Avg. P/E Median
MULTIPLE SEGMENTS
P/E Median - 24.5x
EV/EBITDA Median - 11.8x
(x)
TTM P/E Multiples have expanded substantially from
H2FY20 levels on account of almost NIL PAT profitability for
H1FY20 amongst all companies.

9. Auto Ancillary – Others
This segment contains companies which could not be clubbed with other companies
in the categories discussed earlier. Sectors included herein comprise of HVAC,
Axles, Batteries, Driveline Assemblies, Vehicle AI and Headlamps.
Since all companies (except Amara Raja) cater to the 4W segment majorly, they
continued to post stressed financials even in H1FY21 (resulting in negligible
EBITDA and negative PAT margins). Hence, we found it imprudent and have not
determined TTM valuation multiples for the same.
VALUATION & PROFITABILITY
Average
EBITDA Margins
H2FY18 H2FY20
12.6%12.9%
10.4x16.2x
5.1%5.8%
25.2x39.0x
Average
EV/EBITDA
Average
PAT Margins
Average
P/E
Companies Considered –
Subros Ltd, Automotive Axles,
Amara Raja Batteries, JTEKT India,
Wabco India, Lumax Auto Industries
16.2
13.0
12.5 12.3
10.4
39.0
28.7
26.8 27.0
25.2
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
H2FY18 H1FY19 H2FY19 H1FY20 H2FY20
EV/EBITDA Avg. EV/EBITDA Median P/E Avg. P/E Median
OTHERS - AXLES, HVAC, BATTERIES, VEHICLE AI, HEAD LAMPS
P/E Median - 27.0
EV/EBITDA Median - 12.5x
(x)
Multiples have contracted gradually throughout H2FY18-
H2FY20 on account of the cyclical downturn in the Auto-Sector
coupled with Covid-19 related downfall in H2FY20.

10. Auto Ancillary – Conclusion
Sources of Information – ACMA, IBEF, BSE, NSE, Companies, Ace Equity. TTM = Trailing Twelve Months as per latest information available. Market Capitalisations in TTM
calculations have been considered as on November 30, 2020 for all companies.
Our observations and analyses for the Auto Ancillary sector highlight the following -
2
3
As some companies showcased recoveries in valuation multiples on account of improvement in revenues to pre-covid levels along with
margins rocketing to multi-year highs, sustainability would entirely depend on companies’ abilities to
i. Maintain revenues after the effect of pent-up demand moderates,
ii. Sustain cost optimisations as undertaken in H1FY21 even in the future periods,
iii. Tread with subsequent rise in RM prices which had tapered down on account of poor consumption cycle in H1FY21.
4
Companies largely dependent on OEM sales for their revenues are likely to face delayed recoveries compared to companies catering to
aftermarket components.
Companies having foreign promoters on board, i.e., multinational companies are expected to command premium multiples on account of
higher investor confidence in experienced foreign business houses.
As the recoveries in volumes of 2W, 3W and Agriculture vehicles continue at a much faster pace than for CVs or PVs, companies catering to CV
and PV components are expected to face delayed improvement in profitability and valuation multiples.
1
Our Auto Ancillary Universe for this exercise –
Only Companies above INR 1,000 Crs Market Capitalisation have been considered for this valuations analyses. Further -
i. Companies having two consecutive half years of PAT losses have been excluded completely.
ii. For determining valuation multiples for a particular period, companies having negative P/E multiples and multiples above 100x have been excluded.

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