During these high interest regimes most of the interest rate sensitive stocks have taken a beating. Some of the biggest losers have been in the auto ancillary sectors where stock prices have been cut in half. Few months ago I wrote about Sundram Fasteners in my blog as an attractive candidate for long term holding. After writing about it on my blog the stock has appreciated more than 10% and was trading around 56/- yesterday with good volumes.
Introduction:
Another good company in the auto ancillary sector is ANG Auto Ltd (previously called as ANG Exports Ltd) It is a Delhi based company involved in manufacturing of various components and sub assemblies for braking, suspension and transmission systems for commercial vehicles. It also has a unit in Sitarganj which manufactures Trailers that can be attached behind a tractor trailer to haul 24 and 30T loads. Detail information about the company can be obtained from its website
Positive Factors:
Currently most commercial vehicles in India are fitted with manual slack adjusters. One of its key product called automatic slack adjuster has also got an Indian patent on it. Currently most commercial vehicles in India are fitted with manual slack adjusters. Very soon due to changing laws and advanced automotive designs these manual slack adjusters will be replaced by the automatic versions. This will positively benefit ANG Auto due to its existing relationships with manufacturers like Ashok Leyland.The biggest revenue and margin driver for the company going forward will be the trailer segment. The company has a current capacity to manufacture 500 trailers a month and claims to be the only organized player in India. Rough estimates put trailer demand in India upwards of 1,000 units a month which means the company currently has a capacity to satisfy 50% market demand in India. Improving road infrastructure and supreme court's ban on overloading is bound to increase the sales of trailers because the cost / kg / km for trailer is approximately 30 - 40% lower than in typical trucks. Also increased containerization of domestic cargo will further strengthen the demand for trailers.
Even in the current slowdown in auto ancillary industry the company is able to maintain its operating and net margins in double digits and better than most of its competitors.
Negative Factors:
1) ANG Auto derives significant amount of its revenue from export market which makes it susceptible to currency fluctuations
2) Domestic demand is highly sensitive to interest rate and strength of the overall economy
3) Material cost Inflation is always a risk for commodity intensive business like ANG Auto.
4) Sales to Ashok Leyland did not materialize as projected while constructing the Sitarganj unit
Near Term Catalyst for Stock:
The company announced that it would buy back shares upto 25% of its capital below 215/- about a month ago. What does that tells you is that the company thinks it shares are highly undervalued and is willing to commit its own money to provide better returns to its shareholders. I think the shares should be trading around atleast 215/- levels...........if not more. As per data from corpfiling (http://www.corpfiling.co.in/home/homePage.aspx) insiders also have been buying decent amount of stocks since the buyback was announced.
Valuation:
The stock trades at a P/E ratio of 9.08 and a P/B ratio of 2.7/- with FY2007 eps of 17.51 as per (http://www.moneycontrol.com/). The auto ancillary sector is expected to grow at a CAGR of 15% till 2015 as per ACMA (Automotive Component Manufacturers Association). If we assume that to be true and also assume that the company will atleast grow at the rate of overall sector growth then the stock should atleast attract a P/E multiple of 15 from the market. This will give us a value = 15 x 17.51 = Rs.262/- Of course we are making an additional assumption that there will be no further dillution in equity. I think due to the buyback arrangement the equity of the company will go down in near term which will make the stock look even cheaper.
I feel there is a decent probability to make money in ANG Auto and hence bought it for my personal portfolio. If you are not convinced about the ANG story give it a pass.......I promise you will get lot of other good companies to invest in India. As always if you have any questions feel free to contact me at secmoney@gmail.com or drop a comment at the blog itself
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
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