Investors with an appetite for high risk and a long-term perspective can accumulate the JBM Auto (JBMA) stock on dips. Starting out a sheet metal supplier to the auto industry, the company is slowly graduating into a vehicle manufacturer, making electric buses apart from CNG ones. The government’s thrust on the use of greener vehicles, and in that electric vehicles, especially in public transport, is expected to be a tailwind for this small-cap player over the next decade. The stock has corrected about 15 per cent now, from its one-year high of ₹535 recorded in mid-July. It currently trades at 24 times its trailing 12-month earnings. With markets perched at all-time highs, investors can make use of broader market volatility to take exposure to the stock rather than buying at one go. Being a small-cap stock (full market cap of ₹2159 crore), investors are advised to limit their exposure.

Green prospects

As of FY21, JBMA derived 65 per cent of its revenues from the component division (sheet metal), 11.5 per cent from the tooling division and 25 percent from the bus division. The tooling division is currently the most profitable with segment margins of over 20 per cent, compared with the low to high single digit margin in the other two. Its clients for auto components include VE commercial vehicles, Toyota, Tata Motors, Royal Enfield and Honda.

An inclination towards personal mobility led to some green shoots in new vehicle sales after the initial wave of the pandemic. However, the second wave, periodic price increases taken by auto makers due to the rising raw material costs, as well as production disruptions from semiconductor shortage has put the industry on the back foot now. Despite the low base of last year, these factors are headwinds for the sheet metal as well as the tooling divisions in the near term.

The earnings could continue to be driven by the performance of these divisions over the cyclical upturns and downturns of the auto industry in the medium term. But the stock could be a good long term bet on greener public transport, for investors who have the risk appetite.

As it stands now, India plans to have a 100 per cent EV fleet in public transport by 2030, and will aim for 40 per cent electrification in personal transport by then. This augurs well for manufacturers of electric buses.

Electric buses are being predominantly being procured on a ‘gross cost contract model’ by state government entities, where vehicle manufacturers supply the buses and take care of the operations and maintenance.

While it has already supplied electric buses to Mumbai earlier, they were rolled out in Ahmedabad in May this year. JBMA will also be plying 90 electric buses in Bengaluru for last mile connectivity for metro passengers soon. JBMA provides the charging infrastructure at depots for all its EVs. The company has also been supplying CNG buses to the NCR region.

The bus division turned EBIT positive in FY20. In FY21, EBIT for this division grew three-fold year-on-year to ₹36.1 crore. Revenues for the bus division stood at ₹459 crore in FY21, almost equally divided between CNG and EVs. The outlook is sanguine, backed by a strong order book of over 1000 buses (comprising over 350 electric buses) as of end-FY21, promising good revenue prospects for this division over the next 2-3 years.

Financials

For the quarter ended June 2021, net profits stood at ₹12.19 crore, vs. ₹25.8 crore loss in the same period last year, due to the lockdown during the first wave. Sales moved up over four times, from ₹129 crore in the June 2020 quarter to ₹546.8 crore in June 2021.

EBITDA margin came in at 10.6 per cent for the quarter, compared with 11.6-12 per cent in the preceding three quarters, reflecting the cost pressure. The company has taken price increases in Q1FY21 and sees a 10-15 per cent escalation in input costs in the near future. However, it expects to maintain the margins at the level seen in the recent quarter. A combination of price increases and ongoing cost control measures such as reduction in manpower costs and administrative overheads, should help.

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