Buy Sundaram Fasteners below 50/- and enjoy the ride !!

I had promised to write about international stocks in my current blog, but I found a really compelling investment opportunity thus I decide to postpone the blog on international investment. A friend and colleague of mine Santosh Patro drew my attention to Sundram Fasteners. He wanted to invest in this stock and asked me to evaluate the company for long term investment (approx 3 years holding time period). After reviewing its balance sheet, annual reports, newspaper articles and industry reports; I am coming to a conclusion that Sundram Fasteners is a compelling investment opportunity, which has the potential to double in 3 years time frame if you buy it below 50/-. First let's talk about the broad industry trends. Since the fortune of the company is closely tied to the automotive industry please read the report below from Automotive Component Manufacturers Association for some general background.

http://acmainfo.com/docmgr/Status_of_Auto_Industry/Status_Indian_Auto_Industry.pdf
Let me explain my back of the hand calculations for investing in Sundram Fasteners.

GROWTH:

Average middle class population (people earning above 5,000 USD @exchange rate of 45) in India by 2010 = 350 million
Average members per family = 5
Hence total middle class households in India by 2010 = 350 / 5 = 70 million

Now let's assume that only 10% of this middle class population will be able to afford cars. Hence total number of household's able to afford car = 7 million

Assuming 50% of this demand will be met by new cars and other 50% by used cars; total market size for new cars in 2010-11 in terms of number of units = 7 /2 = 3.5 million
Total cars produced in India annually as per SIAM = 1.5 million
That means in 3 years the automotive market can grow from 1.5 million to 3.5 million units. Since these are assumptions I am introducing a variance factor of 33%. What I am saying is that my numbers are not accurate and they may be off by 33%. Hence according to my calculations in worst case situation; the automotive market may still be = 3.5 x .67 = 2.345 million. This translates into a CAGR of approximately 16%.

VALUATION:

Good companies like Sundram Fasteners can continue to grow their earnings at industry rate in worst case situation. That means its EPS in 2010-11 could potential be around 6.24/- (assuming EPS of 4/- for FY08 and 16% CAGR). Giving a P/E multiple of 16 (same as its earnings growth rate) the value of Sundram Fasteners could be 16 x 6.24 = 99.84/-

Of course.........There are some risks associate with Sundram Fasteners; which every investor should understand before investing in this stock

1) These companies do not have pricing power with automotive companies. When the cost of material goes up we have observed from annual reports that the company has not been able to pass the cost to their customer. This could depress their margins

2) There is still significant debt on its balance sheet which translates into interest payment risk when the interest rates are high

3) Currency valuation affects their export revenue. More than 25% of its revenue comes from export business and any major change in valuation of Indian rupee versus international currencies like USD and Euro will have downward pressure on the earnings.

4) Elimination or change in tax breaks on SEZ , exports, etc can depress its margins

5) Managing international subsidiaries can be quite challenging. Currently all international subsidiaries are making losses.

6) Revenue is dependent purely on automotive sector which is interest rate sensitive. Any negative trends in automotive industry will directly affect this company.

7) Competition from unorganized sector in aftermarket segment is very high as barriers to entry are low. This means in an industry downtrend there is no cushion for Sundram's revenue to stop it from deteriorating.

All said I still feel at the current price (50/-) the risk / reward ratio is more in favor of investors. If you are interested enough by now, please do your own analysis and decide whether you want to buy Sundram Fasteners. If you are not convinced then give it a pass. There will be lot more opportunities in future.

For any questions of Sundram Fasteners feel free to contact me at secmoney@gmail.com com

Regards,
Bargain Hunter

Disclaimer: Investing in stocks is very risky and an individual can loose all the money invested in equity markets. Please consult your financial advisor before investing in any stocks

Disclosure: I have this stock in my personal portfolio at the time of writing this blog