(Business Standard 28th April 2008)
ANG Auto's niche focus in the trailer segment translates into major upsides in the medium-term. The share prices of auto component companies have nosedived over the last one year and are currently trading close to their 52-week lows. The rise in interest rates and the hike in input costs have raised doubts about the ability of these firms to post robust numbers going forward. In this context, companies which are operating in a niche and are dominant in their product segment will be able to better overcome these external shocks than commodity plays. Delhi-based ANG Auto, which makes auto components and trailers, is one such stock going at an attractive price. Integration and expansionTo cater to the increasing demand for trailers (freight carriers attached to motor vehicles), estimated at 24,000 for FY08, the company is eyeing scale as well as integration. It plans to hike its manufacturing capacity of trailers from 300 per month currently to 500 per month or 6,000 a year by the begining of the second quarter at a cost of Rs 36 crore. This, the company claims will make it the largest player for trailers in Asia. The company manufacturers 75 per cent of trailer components in-house and is present in the entire value chain from components, to sub-assemblies and assemblies for trailers. Except for the tyre, rim and spring leaf, the company makes all the components of a trailer. With an estimated growth of 10-15 per cent, FY09 should see sales of around 26,500 units. Trailers vs trucksResearch indicates that trailers can carry more freight at a marginally higher initial investment but lower operational costs. While the operating cost per tonne kilometre for a 16 tonne and 25 tonne truck is Rs 1.53 and Rs 1.12, it works out to just Rs 1.01 for a 35 tonne tractor trailer. The higher increased cost at the time of purchase (40-50 per cent) and the increased fuel cost (30 per cent) is more than compensated by the lower operational costs and doubling of capacity. Increased containerisation and the adoption of a hub-and-spoke model for transportation will translate into a need for larger proportion of heavy commercial vehicles and trailers to ply large distances. To tackle higher interest rates and reduce their transport cost per unit of freight, truckers and logistics players are looking at higher tonnage vehicles of 25 metric tonnes (MT) and over. This augurs well for component makers for higher capacity commercial vehicles and trailers. With sales of 25 MT tonnage vehicles crossing 9,000 per month, the demand for trailers which have a better value proposition should increase from less than 2,000 per month. The Supreme Court ban on overloading of trucks in 2005, which helped push up sales of heavy tonnage commercial vehicles, is also a plus point for the trailer sector as transporters seek to improve operational efficiencies. Geographic diversificationThe company was exporting all its components to overseas customers till 2005, but over the last three years has been eyeing the domestic market. The expansion in the domestic market has helped it to improve its sales from the domestic segment to half from nil three years ago. The company, however, has a concentration of clients in the overseas segment with five customers accounting for 90 per cent of its export orders. ANG Auto had entered into an alliance with Ashok Leyland for marketing its trailers, but the poor response forced it to cancel the arrangement. Sales of trailers in the first six months of FY08, when the alliance was in place, stood at around 300 units (or 50 units a month). However, the company has been able to significantly increase its sales and currently sells about 175 trailers per month now. While it closed FY08 with sales of 900 trailers it expects to notch up sales of 3,200 units in FY09. The setting up of its own distribution network vis-a-vis the exclusive distribution arrangement with Ashok Leyland and the increasing demand for higher tonnage vehicles will help it to push up its sales. Trailer vehicles which contributed a quarter to the company's topline are expected to constitute 60 per cent of revenues in FY09. Investment rationaleWith a low penetration of trailers, preference for higher tonnage vehicles and operational cost advantages there is ample scope for products made by ANG Auto. However, there are dampeners as well. Rising interest costs could curtail the demand requirement for trucks, higher input costs and the inability of component manufacturers to pass on costs could put pressure on margins, while the commercial vehicle slowdown in the US and client concentration could pose problems for the company going ahead.
While short-term factors are not favourable, industry dynamics should ensure that the company is able to sustain higher sales over the medium-term. While the stock, which is trading at Rs 112 has risen 14 per cent in the last one week, there is still scope for appreciation as it is available at 3.6 times its FY10 earnings of Rs 30 and at 5 times FY09 earnings of Rs 22. From a one year perspective, the stock could deliver returns of 20 per cent.
ANG Auto's niche focus in the trailer segment translates into major upsides in the medium-term. The share prices of auto component companies have nosedived over the last one year and are currently trading close to their 52-week lows. The rise in interest rates and the hike in input costs have raised doubts about the ability of these firms to post robust numbers going forward. In this context, companies which are operating in a niche and are dominant in their product segment will be able to better overcome these external shocks than commodity plays. Delhi-based ANG Auto, which makes auto components and trailers, is one such stock going at an attractive price. Integration and expansionTo cater to the increasing demand for trailers (freight carriers attached to motor vehicles), estimated at 24,000 for FY08, the company is eyeing scale as well as integration. It plans to hike its manufacturing capacity of trailers from 300 per month currently to 500 per month or 6,000 a year by the begining of the second quarter at a cost of Rs 36 crore. This, the company claims will make it the largest player for trailers in Asia. The company manufacturers 75 per cent of trailer components in-house and is present in the entire value chain from components, to sub-assemblies and assemblies for trailers. Except for the tyre, rim and spring leaf, the company makes all the components of a trailer. With an estimated growth of 10-15 per cent, FY09 should see sales of around 26,500 units. Trailers vs trucksResearch indicates that trailers can carry more freight at a marginally higher initial investment but lower operational costs. While the operating cost per tonne kilometre for a 16 tonne and 25 tonne truck is Rs 1.53 and Rs 1.12, it works out to just Rs 1.01 for a 35 tonne tractor trailer. The higher increased cost at the time of purchase (40-50 per cent) and the increased fuel cost (30 per cent) is more than compensated by the lower operational costs and doubling of capacity. Increased containerisation and the adoption of a hub-and-spoke model for transportation will translate into a need for larger proportion of heavy commercial vehicles and trailers to ply large distances. To tackle higher interest rates and reduce their transport cost per unit of freight, truckers and logistics players are looking at higher tonnage vehicles of 25 metric tonnes (MT) and over. This augurs well for component makers for higher capacity commercial vehicles and trailers. With sales of 25 MT tonnage vehicles crossing 9,000 per month, the demand for trailers which have a better value proposition should increase from less than 2,000 per month. The Supreme Court ban on overloading of trucks in 2005, which helped push up sales of heavy tonnage commercial vehicles, is also a plus point for the trailer sector as transporters seek to improve operational efficiencies. Geographic diversificationThe company was exporting all its components to overseas customers till 2005, but over the last three years has been eyeing the domestic market. The expansion in the domestic market has helped it to improve its sales from the domestic segment to half from nil three years ago. The company, however, has a concentration of clients in the overseas segment with five customers accounting for 90 per cent of its export orders. ANG Auto had entered into an alliance with Ashok Leyland for marketing its trailers, but the poor response forced it to cancel the arrangement. Sales of trailers in the first six months of FY08, when the alliance was in place, stood at around 300 units (or 50 units a month). However, the company has been able to significantly increase its sales and currently sells about 175 trailers per month now. While it closed FY08 with sales of 900 trailers it expects to notch up sales of 3,200 units in FY09. The setting up of its own distribution network vis-a-vis the exclusive distribution arrangement with Ashok Leyland and the increasing demand for higher tonnage vehicles will help it to push up its sales. Trailer vehicles which contributed a quarter to the company's topline are expected to constitute 60 per cent of revenues in FY09. Investment rationaleWith a low penetration of trailers, preference for higher tonnage vehicles and operational cost advantages there is ample scope for products made by ANG Auto. However, there are dampeners as well. Rising interest costs could curtail the demand requirement for trucks, higher input costs and the inability of component manufacturers to pass on costs could put pressure on margins, while the commercial vehicle slowdown in the US and client concentration could pose problems for the company going ahead.
While short-term factors are not favourable, industry dynamics should ensure that the company is able to sustain higher sales over the medium-term. While the stock, which is trading at Rs 112 has risen 14 per cent in the last one week, there is still scope for appreciation as it is available at 3.6 times its FY10 earnings of Rs 30 and at 5 times FY09 earnings of Rs 22. From a one year perspective, the stock could deliver returns of 20 per cent.
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