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Brokerage Suggests Buy This Small Cap Auto Ancillary Stock, Shares Can Surge Upto 9%

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Axis Securities in its recent report post Q2FY23 results retains its "Buy" rating given to Steel Strips Wheels Limited (Steel Strips), a major Auto Ancillary sector company. The brokerage has given target price Rs 870 per to teh stock of the company with a buy call. According to the brokerage's estimated target price, the investors buying the stock of the company could expect a potential upside of 9% from its current level.

 

Stock Outlook & Returns

Stock Outlook & Returns

On NSE,  the stock last traded at Rs 805.40 per share, gaining 0.35% as compared to its previous close. Its 52-week low was recorded on 27 January 2022 at Rs 676.70 and the 52-week high on 18 November 2022 at Rs 954.50, respectively.  This small-cap company has a market cap of Rs 2,521.11 crore
 
 The stock in the week jump by 5.95%, whereas, in the past 3 months its share price jumped 1.321%. Over the past 1 year, the stock has fallen giving a negative return of 7.63%. Whereas, in the past 3 years, it gave a multibagger return of 108.37%. In the past 5 years, the stock gave 90.12% positive returns, respectively.

Exports Weak; Alloy Wheels to Drive Growth!
 

Exports Weak; Alloy Wheels to Drive Growth!

The brokerage said, "Steel Strips Wheels Ltd (SSWL) Q2FY23 numbers stood below our estimates. Revenues stood at Rs 1,081 Cr, (4% miss), up 13%/6% YoY/QoQ. The company reported an EBITDA of Rs117 Cr (our estimate - Rs 138 Cr), down 15% YoY but up 7% QoQ. While its EBITDA margins stood flat QoQ at 10.8%, they declined by ~350 bps YoY from 14.3% in Q2FY22 and missed our estimate of 12.3% by 144bps. However, after adjusting for ~Rs 70 Cr impact of inflation on the Q2FY23 topline and raw material gain of Rs 30 Cr in Q2FY22, the company's adjusted EBITDA margin in Q2FY23 stood at 11.9% vs. 11.5% in the last year's quarter. The adjusted EBITDA per wheel stood at Rs 255/wheel, which was almost flat on a QoQ basis (Rs 256/wheel in Q1FY23) but slightly improved from RM-adjusted EBITDA per wheel of Rs 230 in FY22. The company reported PAT of Rs 55 Cr (16% miss) down 13% YoY but up 13% QoQ, largely in line with EBITDA." 

Q2FY23 Highlights

Q2FY23 Highlights

Growth Drivers: The company reiterated its revenue guidance of Rs 4,100-4,200 Cr for FY23 (15-18% YoY growth). However, with lower exports, it now expects to achieve the lower range of the guidance. The company has already achieved ~50% of the guidance with H1FY23 revenue now at Rs 2,097 Cr (up 28% YoY). The growth was led by higher alloy wheels sales, up 112% YoY in H1FY23 at Rs 620 Cr. This was partially offset by lower exports which declined by 68% YoY to Rs 157 Cr. With lower exports in H1FY23, the management now expects FY23 exports to fall by 40-45% over FY22 vs the expectation of a 25-30% drop as guided earlier in Q1FY23. Despite the cut in export revenue guidance, the management is confident of achieving the topline growth led by the high-margin Alloy Wheels and CV business. Alloy wheels command higher realisation at Rs 4,000-4,500 per wheel, while steel wheels cost Rs 1,000-1,100 per wheel in the PV segment. For the CV segment, its realisation is almost 5x that of conventional PV. 

The company has guided EBITDA of Rs 450 Cr with an upward bias of 5% (earlier 500Cr +/-5%) in FY23 from an EBITDA of Rs 465 Cr in FY22. In FY22, its EBITDA included Rs 70 Cr inventory gain. Adjusted EBITDA per wheel in Q2FY23 stood at a similar level as that of Q1FY23 and improved from FY22. On a broad basis, the alloy wheel margins per wheel are 50% higher than steel wheels. The alloy wheel and exports have similar operating margins and as a result, the fall in exports will not have a material impact on the margins going forward.  

Segment-wise Volume Break-up

Segment-wise Volume Break-up

Alloy wheels (included in the PV segment) sales volume stood at7.6 Lc wheels,~16% of total volumes (15% in Q1FY23/12% in FY22 and contributed 31% of total revenue in Q2FY23). Domestic steel wheels sales stood at 36.7 Lc (~53% of total revenue) while exports stood at 3.17 Lc wheels (~8% of total revenue). In FY23, Al-alloy wheel's revenue is expected to increase to Rs ~1,200 (25%-30% contribution to total revenue) from Rs 700 Cr in FY22 (20%), whereas exports revenues are expected to drop to Rs 450-500 Cr (11-12%) from Rs 828 Cr in FY22 (23%). The drop in exports would be mainly due to demand concerns from the US and EU. 

Outlook & Valuation

Outlook & Valuation

SSWL is expected to be a beneficiary of the demand revival in the Auto segment, especially the CV, and Al-alloy wheel segment, which are all high-margin products. While export growth is expected to remain muted in the short to medium term, alloy wheels remain the key growth driver. "We expect SSWL to outperform the industry growth given its sticky relations with OEMs across all auto segmentsviz.2/3W, PV, CV, and Tractors. We expect the company to report Revenue/EBITDA/PAT CAGR of 14%/14%/18% over FY22-24E respectively. Factoring in lower export revenue, we revise our Revenue/EBITDA/PAT downwards. We retain our BUY rating on the stock and value it at 5.5x FY24E EV/EBITDA to arrive at a target price of Rs 870/share (Rs 950/ share earlier), implying an upside of 11% from the CMP," the brokerage has said.

Disclaimer

Disclaimer

The stock has been picked from the brokerage report of Axis Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.

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