The Sundram Fasteners stock is a good bet to ride on the upturn in domestic auto sales. This TVS group company supplies ancillaries such as fasteners, radiator caps, hot forged parts and engine components for commercial vehicles, cars, two-wheelers and tractors.

It also manufactures value-added components such as hubs and shafts, and pumps and assemblies. With vehicle sales gaining speed, the company’s market leadership position in fasteners and long-standing relationship with vehicle manufacturers promise good prospects.

Investors with a perspective of one to two years can buy the stock. At the current price, it trades at a price-to-earnings (PE) ratio of about 17 times its trailing 12 month standalone earnings.

This is reasonable, considering that many auto component stocks trade at much steeper valuations, thanks to the rally in the last two years.

Revival in auto sales The revival in truck salesgained further strength in the year ended March 2016. Sale of medium and heavy commercial vehicles (CVs) grew by 16 per cent in 2014-15 and by about 30 per cent in 2015-16, over their respective previous years.

The reform measures taken in sectors such as mining, big investments being made by the government in road infrastructure and the fact that borrowing rates are coming down, bode well for CV sales in the months to come.

Besides, higher industrial growth as the economy gains speed and better agricultural output from the good monsoon are expected to keep demand for freight transport strong and, hence, the demand for CVs healthy. Moreover, the recent drive to ban older and more polluting trucks in certain pockets also bodes well for new CV sales. While the recent pick-up in urban consumption has helped cars clock good sales, two-wheelers, small trucks and tractor sales have also begun their upward move, thanks to green shoots in rural demand. The favourable monsoon forecast is expected to keep demand going in these segments in the months to come.

Sundram Fasteners will be a beneficiary of the upturn in these segments. The company supplies components to many domestic auto makers in India such as Maruti Suzuki, Toyota, Volkswagen, Mahindra and Mahindra, Ashok Leyland , Tata Motors, Bajaj Auto and TVS Motors.

Benefits from diversification Considering that its fortunes depend on the cyclicality of the domestic auto industry, the company has taken steps to diversify its revenue mix.

For one, it exports fasteners and other products predominantly to the US market and to some European markets as well. Exports bring in one-third of the company’s revenue. Car and light truck sales in the US have been seeing strong volume growth and a continuation of this trend will aid the company.

Any weakness in the rupee vis-à-vis the dollar could help improve realisations on this front. Secondly, the company has a foothold in the replacement market for auto parts, where the demand is independent of new vehicle sales.

About 10 per cent of the company’s revenue come from the replacement segment. Margins are also better here since component makers enjoy higher pricing power in retail sales than in direct sale to auto manufacturers.

Financials For the year ended March 2016, standalone net sales for the company grew by 10 per cent over the previous year to ₹2,562 crore. Though making small profits, the company’s prominent subsidiaries based in UK (Cramlington Precision Forge) and China (Sundram Fasteners Zhejiang) are yet to meaningfully contribute to the consolidated bottom line.

The company has recently sold its entire stake in the loss-making German subsidiary, Peiner Umformtechnik. Net profit, after adjusting for exceptional loss of ₹45.6 crore on disposal of subsidiary and impairment of certain loans/investments, moved up by 78 per cent to ₹255 crore. Reported profits moved up by 56 per cent to ₹211 crore. Operating margin expanded from 13.9 per cent a year ago to 14.7 per cent in 2015-16, thanks to decline in input costs.

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