Sundram Fasteners: Buy

Investors can buy Sundram Fasteners stock to ride on the revival in domestic auto sales. This TVS group company supplies ancillary parts such as high tensile fasteners, radiator caps, pumps and assemblies, and hubs and shafts, mainly for commercial vehicles (CVs) and cars.

With vehicle sales looking up, the company’s market leadership position in fasteners and long-standing relationship with vehicle manufacturers promise good prospects.

The company derives about 30-40 per cent of its revenues from exports and replacement markets, which acts as a valuable diversifier in the cyclically-driven domestic auto industry.

The ongoing market rally has lifted Sundram Fasteners stock by about four times in the last year.

But it still trades at a reasonable price-to-earnings ratio of about 22 times its estimated standalone earnings for the year ended March 2015.

Given the upturn in auto sales, the company seems well-positioned to record double-digit earnings growth in the next one to two years.

Earning about half its revenues from supplies to trucks and buses, Sundram Fasteners’ business depends on the demand for CVs. After recording a 25 per cent fall in volumes in 2013-14, some green shoots are visible in CV sales in the first half of this fiscal.

The fall in volumes has been arrested at just around 1 per cent in this period, with heavy truck sales already turning around to show a 4 per cent growth.

In the months to come, greater demand for freight carriage from a pick-up in industrial activity is expected to aid volume growth in CVs.

Given that Sundram Fasteners is a market leader and a supplier to both Tata Motors and Ashok Leyland — the biggest CV manufacturers in the country — the company will be a direct beneficiary of the revival.

Besides fasteners, the company has added several products to its line-up over the years.

These additions to its product line improve the content supplied per vehicle, giving it greater pricing power when negotiating with vehicle manufacturers.

Besides, the value-added nature of components such as hubs and shafts and pump assemblies help in margin expansion as well.

The company is also focusing on exporting these value-added supplies to passenger vehicle markets in the Europe and the US. Considering the robust long-term overseas contracts, the company set up a new factory at the Mahindra World City SEZ near Chennai during 2013-14.

A third sweetener for the company is the improving performance at its major German subsidiary. Overall subsidiary operations including other domestic and international subsidiaries are expected to begin contributing to the bottom line from this year onwards.

For the half year ended September 2014, standalone net sales grew 16.5 per cent to ₹1,173 crore over September 2013 and net profit rose by 38 per cent to ₹89 crore. Operating margins came in at 16.2 per cent compared with 11.9 per cent a year ago.

A major dampener for this recommendation will be a slower-than-expected revival in domestic CV sales.

Hence, only investors with a high risk appetite should buy into this stock.