Gabriel India: In full throttle - Buy

With vehicle sales firing on all cylinders in the last few months, many auto component stocks have been on a roll. Gabriel India is no exception. Manufacturing ride-control products such as shock absorbers, struts and front forks, the company supplies to almost all segments of the auto industry, be it bikes, three-wheelers, trucks or cars.

Since our ‘buy’ recommendation in April this year, the stock has gained about 30 per cent. But Gabriel India should continue to benefit from the robust outlook for auto sales. Sales in many segments have not peaked yet and there is comfortable room for volume growth in the months to come. Hence, we reiterate a ‘buy’ on the stock.

The stock now trades at 22 times its trailing 12-month earnings. This is not cheap per se , as valuation of many mid- and small-cap stocks have expanded across the board due to healthy growth prospects.

Nevertheless, the stock is cheaper than peer mid- and small-caps such as Wheels India (29 times), ZF Steering Gear (28 times) and Automotive Axles (27 times). Investors can take limited exposures though, considering the stock’s small-cap nature (market capitalisation of about ₹1,700 crore).

Gabriel caters to leading auto manufacturers, such as Maruti Suzuki, Tata Motors, Toyota, M&M, Ashok Leyland, Honda, Bajaj, Royal Enfield and TVS. With 50-60 per cent of its revenue coming from the two- and three-wheeler segments, Gabriel was on a sticky wicket until early this year. In 2015-16, motorcycle sales volumes shrunk about 1 per cent over the previous year due to petering out of rural demand.

While healthy growth in scooter sales of key clients such as Honda and TVS and good demand for premium bikes of clients such as Royal Enfield did help a bit, Gabriel remained affected by the overall downturn in motorcycle sales. Lacklustre sales of three-wheelers and small trucks (four-wheelers) did not help either.

But things have taken a turn for the better in the last few months and the company is in a sweet spot right now. Consumption is looking up, thanks to good monsoon, measures to boost the rural economy announced in the Budget, lower borrowing costs and the seventh Pay Commission awards. This has had a spill-over effect on two-wheeler sales this fiscal. While the scooter segment has continued its strong double-digit growth, up 23.7 per cent so far this fiscal, motorcycle sales have risen by 11.8 per cent in April-October 2016.

Catering to all major two-wheeler manufacturers barring Hero, Gabriel is expected to have a smooth ride on this upturn in the months to come. The company will also benefit from higher share of business with aggressively growing players such as Honda. It has been roped in to supply shock absorbers to Honda’s Gujarat plant, which commenced operations in early 2016.

Besides, though heavy truck sales are cooling off, sale of small trucks used in last mile connectivity is heating up, thanks to improving consumption. Apart from supplies to three-wheelers, the company also caters to small four-wheeled cargo carriers such as Ace, Dost, Jeeto and Trump. Commercial vehicles bring in about 15 per cent of the company’s revenue, with a good bit from such small trucks.

For the half-year ended September 2016, the company’s net sales grew by 6.5 per cent to ₹757.6 crore, operating margin expanded from 8.9 per cent in the April-September 2015 period to 9.4 per cent now, thanks to some operating leverage from improving sales and stable raw material costs.

Lower finance costs from an ongoing debt reduction initiative and a boost in other income helped net profit expand by 11 per cent to ₹40.7 crore. With prices of many commodities beginning to show a reversal from their lows, margin expansion from low input prices may be hard to come by in the quarters to come. But operating leverage from robust sales may help to an extent.

Besides, the company has expanded its offerings in the secondary market for replacement sales to include products such as front row coils and bush kits, apart from radiator coolants and wheel rims.

This should give scope for further margin expansion as component suppliers usually have greater pricing power in secondary market sales. Gabriel derives about 15 per cent of its revenue from the replacement markets.

COMMENT NOW