Investors with an appetite for high risk and a long-term perspective can accumulate the shares of Sandhar Technologies on dips. The company manufactures auto components such as locking systems, mirrors, aluminium die casting, cabin fabrications and sheet metal products. Sandhar is the leader in locking systems for two-wheelers (2W) and rear view mirrors for commercial vehicles (CV) in India. . Sandhar scores on the diversity of its product offerings which give the company the opportunity to cross-sell products to its customers and increase the contribution per vehicle. To capitalise on its existing relationships, Sandhar has entered into supply of electronic components through group companies.

With the auto industry on a sticky wicket, there are no immediate triggers for the stock. But for those willing to hold for the long-term, having already begun supplies to electric vehicles (EVs), Sandhar is a play on the increasing thrust on EVs by the government.

The stock has corrected about 17 per cent now, from its one-year high of ₹333 recorded earlier this month. It currently trades at 19 times its trailing 12-month consolidated earnings. Peer small cap auto companies who are also stepping up their EV game - Fiem Industries and JBM Auto - trade at 17.5 times and 28 times respectively. With markets touching all-time highs, investors can make use of broader market volatility to take exposure to the stock . Being a small-cap stock (full market cap of about ₹1700 crore), investors are advised to limit their exposure.

Prospects

Sandhar derives 57 per cent of its revenues from two-wheeler supplies and 22 per cent from car components. It has a well-diversified client mix catering to OEMs such as Hero, TVS, Royal Enfield, Suzuki, Honda, Mahindra & Mahindra, JCB, Caterpillar and Ashok Leyland domestically. About 20 per cent of its revenues come from exports.

The second Covid 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.

In the medium-term too, the earnings could continue to be driven by the cyclical upturns and downturns of the auto industry. But for the long-term though, the stock could be a good bet on greener transport.

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. Though EV penetration across two- and four-wheelers is miniscule today, mushrooming EV start-ups, high fuel costs and affordable vehicle prices may increase the adoption of electric two- wheelers over the next few years. CRISIL estimates electric two-wheeler penetration to reach about 8 per cent by fiscal 2026 from 1 per cent currently. The share of EVs in total car sales is expected to be 4 per cent in fiscal 2026, from 0.16 per cent in FY21. Sandhar’s tilt towards two-wheelers and cars is a positive in this context.

Sandhar has already started supplying ignition and switch locking systems, mirrors and wheel assemblies domestically to two-wheeler EV clients such as Ather, Ampere, Revolt and TVS as well as to Mahindra Electric. It is supplying EV components to tier 1 suppliers in the overseas markets as well. Purchase orders have been received from more two-wheeler EV players such as NDS Eco Motors and Gravton and discussions are on with Okinawa, Hero Electric and Ola Electric too.

While EV revenues are not a significant contributor to revenues now, given that it has started supplying to EV manufacturers and has good relationships with traditional OEMS who are also gradually transitioning, it is well positioned to ride the wave in the medium term.

To support its EV foray, the newly announced PLI scheme too could come in handy. Sandhar qualifies based on both the revenue and fixed asset criteria for component makers.

Financials

Barring the June 2020 quarter where the company incurred a consolidated loss of ₹31 crore (due to Covid-related lockdown), the top and bottom line showed healthy growth in the rest of the quarters in FY21. The latest June 2021 quarter was again impacted as the operations were closed almost 40 per cent of the time due to the second wave. Thus the company made only a marginal profit or ₹2.22 crore in this period vs. the loss of ₹31 crore a year ago. Net sales stood at ₹410 crore vs ₹129 crore a year ago, but lower than the run rate of the previous quarters. Operating margins came in at 6.5 per cent vs 10.5-11.5 per cent in the previous three quarters.

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