Should you subscribe to the Sansera Engineering IPO?

BL Research Bureau

Investors with a high risk appetite and a long-term perspective can subscribe to the IPO of Sansera Engineering. The company manufactures precision components such as connecting rods, rocker arms, crankshaft assembly and gear shift forks for the automotive industry. About 12 per cent of revenues come from supplies to non–automotive segments such as aerospace, off-road and agriculture and 35 per cent, from exports. Consistent double digit operating margins, long standing relationships with auto manufacturers and efforts to de-risk from dependence on internal combustion engine (ICE) vehicles are positives for the company.

With markets at a peak, Sansera is looking to make hay when the sun shines - the IPO is entirely an offer for sale by the promoters and other strategic investors. At the upper end of the price band of ₹734-744, Sansera will raise ₹1,283 crore. The market cap will be around ₹3,800 crore.

Coming during a raging bull market, the valuation, at about 35 times FY’21 earnings, is not cheap. There are no direct peers for Sansera. The company has some commonalities with Bharat Forge, but the latter has made losses in the last fiscal. Sansera gets half of its automotive revenues from the two-wheeler segment, with Bajaj Auto being its largest customer (20 per cent of revenues). Component suppliers to the two–wheelers such as Endurance Technologies and Minda Industries trade at 35 and 58 times their trailing 12 month earnings respectively.

Where it scores

A downturn in the auto industry, followed by the Covid outbreak dented revenues for Sansera over the past three fiscals. Revenues for the year ended March 2021 stood at ₹1,549 crore, which is only slightly above the ₹1,457 crore logged in 2019-20 and lower than ₹1,624 crore in 2018-19. Working capital pressures are also visible in fiscals 2019 and 2020. While there has been a reduction in current borrowings in fiscal 2021, the receivables and payables days have gone up a bit.

However, profits grew at a CAGR of 5.82 per cent in this period to ₹109.8 crore in the year ended March 2021. Though prices of metals such as steel and aluminium - key raw materials for the company – went up sharply, operating margins came in 17.5 per cent for fiscal 2021 , higher than 15.4 per cent in fiscal 2020 (17.7 per cent in fiscal 2019). Two factors help the company in maintaining healthy double digit margins - one, strict internal norms that the company won’t sign up for supplying a product unless it generates a certain return on investment ( ROCE of 15 -20 per cent) over a specified time period, and two, pass through arrangements with domestic customers for cost escalations. Exports too bring in higher margins than domestic sales, providing a cushion.

Key challenges

Key components being manufactured by Sansera are powertrain products (connecting rods, rocker arms, crankshafts) and a catching on of electric vehicles (EV) is a threat to their business. As it stands currently, India plans to have a 100 per cent EV fleet in public transport by 2030, and will aim for 40 per cent electrification in personal transport by then. Though EV penetration across two- and four-wheelers is miniscule today, mushrooming EV start-ups, high fuel costs and affordable vehicle prices may increase the adoption of electric two- wheelers (e-2W) over the next few years. CRISIL estimates e-2W penetration to reach about 8 per cent by fiscal 2026 from 1 per cent currently, with higher penetration in scooters than in motor cycles. The share of EVs in total car sales is expected to be 4 per cent in fiscal 2026, from 0.16 per cent in FY21.

Sansera is taking on this challenge by moving into technology (ICE or EV) agnostic products as well as by increasing the share of non-automotive business. While these two segments bring in 17 per cent of the revenues now, it is expected to double in three years’ time and move up to 40 per cent in five years. Towards this, new facilities for electric and hybrid products as well as aerospace and defence is being commissioned in fiscal 22/23.

Besides, the company is already producing aluminium forged products and stem components for two-wheelers, braking, drivetrain and chassis components for cars and cabin tilt systems for commercial vehicles. All these are suited for both ICE and EVs

Client base

Sansera has long-standing relationships with Bajaj Auto, Yamaha, Honda and Maruti Suzuki. TVS Motors has been added recently. The company is well-positioned to leverage on these relationships in the transition to EVs. The company has already secured business with a pure e-2W player recently for precision forged and machined suspension and axle components. It has also secured business for multiple drive train components, specifically for hybrid EVs, from a leading global passenger vehicle OEM.

As of July 31, Sansera has been awarded business from 35 customers including for electric and hybrid vehicles across engine, suspension, transmission, steering, chassis and braking components. Business from 21 customers in the non-automotive space is also in the pipeline.

While Sansera has the founder and other experienced promoters on the board, the company is professionally managed, with an independent CEO.