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“BUY This Small Cap Stock For 26% Upside In 6 Months Suggests HDFC Securities

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HDFC Securities Limited, a leading brokerage house of India has suggested buying the stock of Precision Camshafts Limited with a target price of Rs. 168. The brokerage forecasts a 26 percent growth rate in six months from the stock's current market price of Rs. 132. Precision Camshafts Limited (PCL) is a global leader and one of the world's leading camshaft manufacturers, manufacturing a diverse range of camshafts.

 

Q2FY22 results of PCL

Q2FY22 results of PCL

The brokerage has said that the company's "Consolidated revenue grew by 17% YoY to Rs 215cr driven by higher realisation. However, on a sequential basis revenue growth was muted at 3.4% due to underperformance of the domestic market on account of staggered lockdowns. Company-wise Standalone (Precision Camshaft) revenue stood at Rs 120cr while subsidiary companies' revenue for MEMCO/MFT/EMOSS stood at Rs 14/43/46cr respectively. EBITDA increased 56% YoY on account of lower raw material expenses. EBITDA margins expanded ~340bps to 13.7%. PCL reported a PAT of Rs 20cr against Rs 10cr in Q2FY21. Adjusting for exceptional items, PAT increased by 89% to Rs 8cr."

According to HDFC Securities "PCL received compensation for the canceIlation of the order and sunk cost from a customer amounting to Rs 24.9cr offset partly by Impairment of property, plant & equipment amounting to Rs 11.8cr during the quarter. Company-wise Standalone (Precision Camshaft) EBITDA stood at Rs 21cr while subsidiary companies' EBITDA for MEMCO/MFT/EMOSS stood at Rs 3.0/5.2/4.6cr respectively. Revenue from European operation increased 11% YoY to Rs 117cr and accounted for 55% of total revenue, down from 57% in Q2FY21. Domestic revenue grew 37/22% YoY/QoQ to Rs 70cr."

The brokerage’s take on Precision Camshafts Ltd.
 

The brokerage’s take on Precision Camshafts Ltd.

The brokerage in its research report has said that "The performance of Precision Camshaft Ltd (PCL) was impacted over the last few years due to a global slowdown in the automobile industry which was further complicated by Covid related disruption. The company also had to incur losses in its Chinese JV. The global recovery in automobile demand and improving performance of its subsidiary companies augur well for future growth. Although the adoption of EV could put a dent in the camshaft market, we believe mass adoption of EVs is still some time away and PCL would benefit from the rising demand of ICE vehicles till then. Nevertheless, the company has made strides towards participating in the EV opportunity by acquiring Emoss (its 100% owned European subsidiary), which produces and supplies electric drivetrains and has successfully demonstrated capabilities to retrofit in ICE based buses and other heavy vehicles."

The brokerage has also stated that "Apart from this, it also offers high-end battery systems, fuel cells, range extenders, generators, power electronics and control systems suitable for different industries. Acquisition of MFT, a specialist in machined components has resulted in broadening PCL's product portfolio and has given access to developed markets of Europe and North America. The group's automotive component business is now well diversified in terms of product as well as customer base where no single customer contributes to more than 23% of revenues. The company is debt-free on a net basis with strong free cash flow generation which it can utilize for any inorganic growth opportunities."

Buy Precision Camshafts Ltd. with a target price of Rs. 168

Buy Precision Camshafts Ltd. with a target price of Rs. 168

According to the brokerage's call "We expect PCL's revenue/EBITDA/PAT to grow at 16/31/173% CAGR over FY21-FY24, led by the increased demand from the domestic automobile industry and strong growth in the European business. We expect RoE to improve from 0.5% in FY21 to 8.6% in FY24. We believe investors can buy the stock in the band of Rs 143-146 and add on dips to Rs 125-128 band (22.5x Sep-23E EPS) for a base case fair value of Rs 157 (28x Sep-23E EPS) and bull case fair value of Rs 168 (30x Sep-23E EPS) over the next 2 quarters."

Disclaimer

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.

Story first published: Friday, November 26, 2021, 12:52 [IST]
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