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The cyclical recovery in commercial vehicle (CV) sales makes the Jamna Auto Industries stock a good bet. The company is the market leader in supply of leaf and parabolic springs for commercial vehicles.
Springs are part of a vehicle’s suspension system and are used to support the weight of the vehicle and spread the load over the chassis. Jamna has a diversified client list, including Tata Motors, Ashok Leyland, Volvo, AMW and Bharat Benz.
Investor preference for cyclical stocks has seen valuations of many auto-component players zoom since 2014. But at ₹196, Jamna trades at comparatively reasonable valuations of 26 times its trailing 12-month earnings.
Those buying the stock may want to consider a limited exposure, given its small-cap nature (market capitalisation of ₹780 crore).
Strong demand After the downturn that affected the entire auto industry till 2013-14, domestic truck and bus sales (medium and heavy tonnage vehicles) showed a convincing revival during the last fiscal year, growing 16 per cent.
The good run continued in April and May. With manufacturing and mining activities slowly recovering, greater demand for freight carriage can aid volume growth in commercial vehicle sales in the coming months.
Besides springs, Jamna has expanded its product portfolio to include value-added, high-margin products such as lift-axles and air suspension systems in recent times.
The shift in market preference towards higher-tonnage vehicles augurs well for lift-axles, which are used for load-bearing purposes in heavy vehicles.
Air suspension systems have applications in low-floor buses, which are increasingly being used for intra-city transportation. This apart, to de-risk from the swings in new commercial vehicle sales, Jamna has developed a strong dealer footprint. This will cater to the replacement demand for these components in existing vehicles, which is again a high-margin segment.
In line with improving commercial vehicle sales, Jamna’s financials have looked up in the last three quarters. For the quarter ended March 2015, net sales shot up 41 per cent to ₹296 crore, over the March 2014 quarter. Net profit surged four fold to ₹15 crore.
Operating margins stood at about 8.6 per cent, compared with 5 per cent a year ago. With the upturn in vehicle sales gaining ground, Jamna Auto is well-poised for double digit earnings growth in the next 1-2 years.
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