For the six months ended September 2011, the auto industry volume growth has taken a beating. But unlike the complete slowdown witnessed in 2008-09, the industry is still experiencing pockets of reasonable growth. This scenario plays out favourably for ZF Steering Gear (India), which manufactures mechanical and hydraulic power steering systems for CVs, tractors and utility vehicles. A key interface between the driver and the vehicle, steering systems influence vehicle response, driver controllability, comfort, safety and fuel economy. The company's clients include Tata Motors, Ashok Leyland, Mahindra, Eicher, Force, Man Force, AMW, Volvo, Escorts and TAFE. It commands a market share of about 45 per cent in the domestic CV space. This apart, it also enjoys superior operating margins of over 20 per cent and a low debt-to-equity ratio (0.13), making the stock an attractive bet for the long-term.

Hence, investors with a perspective of two or more years can consider exposures to the ZF Steering stock. Broader market volatility has seen the stock hit its 52-week low of Rs 265 recently. At the current market price of Rs 278, it trades at a PE of about 6 times its trailing 12-month earnings. Considering the small-cap status of the stock and the thin trading volumes, only those with an appetite for risk should invest.

Demand boost

Even as the auto industry growth has moderated, light commercial vehicles (LCVs), true to their non-cyclical nature, have shown a strong growth of 29 per cent in April-September 2011. Medium and heavy commercial vehicle (MHCV) volumes too have inched up by about six per cent during this period. Although industrial output remains sluggish, data from the Indian Foundation for Transport Research and Training (IFTRT) shows that truck rentals on trunk routes have increased by 9-14 per cent in the first six months of this year. Truck owners have been able to pass on increases in diesel and tyre prices and auto financing costs, thanks to good cargo availability from small and medium manufacturing enterprises and the demand for movement of food, cereals and oil seeds. Besides, the report also indicates that cargo dispatches to cities/towns having close proximity to rural areas have displayed a major spurt, suggesting that the rural consumption story is still strong.

All this, along with good agricultural growth, and an expected peaking out of the interest rate cycle, indicates that the MHCV volumes will pick up sooner than later. Aside of this, although passenger car volumes have shrunk by about 2 per cent in the first half of 2011-12, domestic sales of vans and utility vehicles have continued to grow at about 20 per cent and 10 per cent respectively, pointing to the fact that demand is still holding up on this front. Ditto with tractors, which is benefiting from higher liquidity and incomes in the rural areas and good monsoons. ZF Steering will be a beneficiary of these positive feelers emanating from the market. As at end FY11, the company has a capacity of three lakh units p.a. for power steering gears and two lakh units for mechanical steering gears.

Healthy Margins

For the quarter ended June 2011, the company's net sales grew by 26 per cent to Rs 82 crore. While a combination of lower other income and higher tax expenses limited the net profit growth to about two per cent (to Rs 12 crore), the company recorded a 21 per cent growth in operational profits. Operating margins came in at a healthy 22.5 per cent, just a tad lower than the 23.5 per cent recorded in the June 2010 quarter.

One reason for the superior operating margins could be the pricing power the company enjoys, considering that it supplies to almost all the players and has a dominant market share in the CV space. For example, the company meets 65 per cent of the requirements of Tata Motors and is the sole supplier for Eicher and Man Force. Another contributing factor is also its captive power plants, which help save on fuel costs. About 75 per cent of the company's power consumption is met from the seven wind turbine machines it operates. Going forward, both these factors combined with a flattening of input prices would help the company maintain margins.

Related Topics
comment COMMENT NOW