Portfolio

Braving the odds: On the fast track - ZF Steering Gear

Parvatha Vardhini C | Updated on January 24, 2018 Published on July 12, 2015

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Indian companies stumbled through FY 15, with sharp deterioration in performance in the second half. While revenue for CNX 500 companies contracted by 2.9 per cent in the six months to March 2015, earnings fell 25 per cent. But there were some companies that proved their mettle by recording strong numbers in this period.

ZF Steering Gear, a company manufacturing mechanical and hydraulic power steering systems, has been a major beneficiary of the recovery in domestic truck and bus sales in 2014-15. In line with the improvement in sales volumes of commercial vehicles as the year progressed, the company’s financials have also looked up. Net sales in the second half of 2014-15 grew by 15.5 per cent (over second half of 2013-14) to ₹165.5 crore. This is higher than the 11 per cent growth clocked in the first half.

Profit growth too has zoomed in the October 2014–March 2015 period from the 9 per cent drop in April-September 2014.

The good run is expected to continue. 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 trend has continued in the first three months of this fiscal too, with sales volumes growing by 23 per cent. With manufacturing and mining activities slowly recovering, greater demand for freight carriage can aid volume growth in commercial vehicle sales in the coming months.

Lower interest rates and inflation are expected to push up car and utility vehicle sales as well. ZF Steering also supplies to these segments.

Besides, the company also enjoys high operating margins of around 20 per cent. One reason for the superior margins could be its pricing power, considering that it supplies to almost all the players such as Ashok Leyland, Tata Motors, Bharat Benz, AMW, Volvo and Eicher and has a dominant market share in the CV space. Another contributing factor is also its captive power plants, which help save on fuel costs.

Market preference for cyclical stocks has seen valuations of many auto component players move up sharply in the last one-and-a-half years. In comparison, ZF Steering still trades at reasonable valuation of about 29 times its trailing twelve month earnings. With auto sales still in the early stages of a cyclical upturn, the company is well poised for double-digit earnings growth in the next one-two years.

Published on July 12, 2015
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