Gabriel India: Good shock absorber

With new vehicle sales convincingly recovering from the shocks of demonetisation and implementation of GST, stocks of auto and auto component players are good bets at this juncture.

Among auto component manufacturers, Gabriel India presents an attractive buying opportunity.

Manufacturing ride-control products such as shock absorbers, struts, cartridges, cabin/seat dampers and front forks, the company supplies to almost all segments of the auto industry, be it bikes, three-wheelers, trucks or cars.

From our ‘buy’ recommendation in November 2016, at ₹117, this small-cap stock moved up to touch a high of ₹222 in September 2017.

However, it has lost a bit of sheen since then, correcting by 25-30 per cent from its highs. Investors with a two-year time horizon can make use of this opportunity to enter the stock.

Many small and mid-cap auto component stocks have seen their valuations expand sharply over the last two to three years and Gabriel is no exception.

However, it still trades at a relatively reasonable valuation of 24 times its trailing 12-month earnings.

Peers such as Automotive Axles (31 times), Lumax Industries (38 times), Jamna Auto Industries (33 times), and Wheels India (37 times) are much more expensive.

Smooth ride

Gabriel caters to leading auto manufacturers such as Maruti Suzuki, Tata Motors, Toyota, Hyundai, M&M, Ashok Leyland, Honda, Bajaj, Piaggio, Royal Enfield and TVS.

While two-wheelers bring in 57 per cent of the revenues, cars and commercial vehicles (CVs) chip in with 31 per cent and 12 per cent respectively.

The company has technical collaborations with global partners such as KYB - Japan, for cars, KYBSE - Spain, for cars and CVs, Yamaha Motors Hydraulic System Company for two- and three-wheelers and KONI for luxury commercial vehicles and buses.

The overall growth (year-on-year) in new vehicle sales have doubled in 2017-18, from the 7 per cent seen in 2016-17.

After dampeners such as demonetisation, changeover to BS IV emission norms and the GST shift, urban consumption has picked up.

Rural consumers too are likely to have more disposable income in their hands, given the government’s focus on improving rural livelihoods through various measures announced in the Budget.

Expectation of a normal monsoon in 2018 is an added positive for rural consumption. Hence, new vehicle sales are expected to remain strong in the months to come. In the recent past, it has won several orders for supply of components to new two-wheeler models from companies such as Yamaha, Suzuki and Royal Enfield.

It has also recently won an order to supply front forks to Honda Activa, which is among the top-selling scooters in the country.

Scooter sales grew at 20 per cent in 2017-18, faster than the overall auto industry growth.

On the passenger vehicle side, sales of utility vehicles have grown at a faster pace than cars in recent times, indicating a maturing Indian market.

Gabriel India is well-placed to cash in on this trend through the supply of components to highly-successful models such as the Vitara Brezza.

With the economy gaining steam, commercial vehicle sales are also expected to be strong. The year 2017-18 saw a rebound in CV sales, with sales of both light and heavy trucks growing at 19-29 per cent after the slowdown in the previous year. This trend will continue.

The Society of Indian Automobile Manufacturers (SIAM) expects increase in infrastructure spends, stricter implementation of overloading ban, improved mining output, container traffic and cement movement to support medium and heavy CV sales in 2018-19.

Gabriel India has over 80 per cent market share in the supply of products such as shock absorbers and dampers to CVs.

Improving financials

For the nine months ended December 2017, net sales for the company grew by 18 per cent year-on-year (y-o-y) to ₹1,336 crore, while net profits grew by 14.2 per cent y-o-y to ₹68.5 crore. Operating margins came down a bit from 9.6 per cent a year ago to 9.3 per cent currently.

According to the company, margins have been under a bit of pressure due to lower share of after-market sales.

Increased demand from vehicle manufacturers saw the proportion of the company’s sales to this segment come in at 86 per cent.

The share of after-market sales was 11 per cent (13 per cent in the previous year).

Companies enjoy higher pricing power in the segment as they sell to retail clients. With auto makers, the bargaining power tends to be lower. The company has a low debt-to-equity ratio of 0.02.

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