CMP : Rs. 119/-
Gabriel India is Anand Group Company with 2016 sales of Rs. 1450 Cr and Market Cap of around Rs. 1700 Cr. The company is virtually debt free and generates a ROE of 20% + with OPM of about 9%. It is a professionally managed company with 70% technical and engineering staff.
Gabriel is one of the largest Shock Absorber, Struts and Front Fork manufacturer in India for 2W, 3W, 4W and LCV industry. The market structure is oligopolistic as the product is technology intensive and requires constant technological up gradation with introduction of better “riding comfort” in passenger vehicles.
56% of their revenue comes from 2W, 32% from 4W and 12% from CV sector (in Q1 17). Looking it in another way, 82% revenue from OEM, 14% from Replacement and 4% revenue comes from exports.
In India their market share in 2W is almost 24% and they are largest followed by Endurance Technologies (Sales Rs. 3400 Cr. in FY 15, 33% revenue from Shock Absorber sector) and Munjal Showa (sales Rs. 1500 Cr. in FY 16).
In 4W industry they are the 3rd largest player and Tenneco (Sales Rs. 1000 crores in FY 15), Munjal Showa, Magneti Marelli (unlisted) and Blistein (unlisted) are major international players who operate in India.
The industry structure is such that for a particular model of a 2W or 4W vehicle, one single vendor (and in few large volume segments two vendors) is selected by OEM from design stage for entire supply, as shockers and front forks are a critical but low priced component for ride comfort, tyre performance and load balance. So, if a vendor gets selected and vehicle model does well in the market, the volume is assured. Like, for Maruti S Cross and Vitara Brezza and new LCVs (Y9T), Gabriel has been selected as the sole supplier. Though the segment of business has wafer thin margin from OEM but the replacement cycle of 4W shockers are much quicker compared to 2W and aftermarket very profitable. Gabriel is actively pushing the products in dealer channels to meet the replacement demand. Here the threat from Chinese imports are minimal as product fitment is automobile specific and brand specific.
In 2W segment, margin is much higher but replacement cycle is much longer as “front fork”, which is the highest margin product till date for companies like Gabriel are hardly ever replaced in entire product life cycle of a motorcycle. The cost component of shock absorbers are less in scooters than in motorcycle.
Present Scenario: During FY 16, in spite of stagnant growth from 2W industry, company maintained its overall top line by aggressively getting into 4W and aftermarket segment. The Gabriel retail shops where they also sell traded items like tyre and other components have started getting traction. They are sole supplier of front forks and absorbers to TVS Motors, Suzuki Yamaha and Royal Enfield and second largest supplier for Bajaj range. We can assume the volume from Bajaj may be much lower compared to what Endurance gets from Bajaj as promoters of Endurance Technologies are close relatives of Bajaj Family. They recently also got a foothold into Hero and Honda group by becoming a supplier to Hero Cycles. We don’t value this development as a major breakthrough though, since Honda globally has a relationship with Showa. But if they continue to pursue it, in future it may open large possibilities. Also, they have been selected as global partner for ISUZU for South East Asian countries market for 4W vehicles. And also have a good export order from Renault, if market sources are to be believed. Munjal Showa absorbers are always costlier than Gabriel as per market feedback.
All their plants now are running at near optimal capacity as 2W sales are picking up gradually compared to last year primarily due to high end motorcycles like Royal Enfield growth in urban market, and demand for scooty and scooters among female riders. The low and mid-range motor cycle sales growth is a function of rural income growth and it is stagnant since last couple of years. When it picks up, the probability of margin expansion would be higher. The 4W dependent plant in Gurgaon is underutilized, which we believe will pick up with good volume of sales in the category of cars like Vitara Brezza, S-Cross and Y9T (LCV). Company is also investing heavily in Hosur plant with increasing automation in the production process. We expect margin to improve going forward here along with volumes.
Anyone interested to get into details about overall performance of the company can refer to company presentations here Analyst Presentation Q1 17.pdf (2.0 MB)
Huge exports of Indian 2W in African and South Asian market opens possibility of higher replacement exports of Gabriel products even though replacement cycle of 2W shock absorbers are very long.
They recently have developed some shock absorbers for high end railway coaches and claim to be unique. Business opportunity from it would take time to fructify.
Biggest change in fortune of Gabriel is possible if they get access to latest technologies from their technology partners like Kayaba (2W & 4W) and Koni (CV). Today all other competitors are having access to best in class quality from companies like Showa, Hitachi or Blistein. We believe with their focus on R&D and India’s growing market of 2W and 4W; established long relation with vendors; company would gradually get into closer association with their technology partners to improve their product quality and consistency. In Auto industry circles, company is known for best price, delivery and customer friendliness but lacking in quality parameters. Management is quite aware about the issue and possibly trying hard to address it.
Risk Factors: KYB Motorcycle Suspension India Private Limited (Kayaba company, they own 66.6%, 33.3% owned by Yamaha) have started operation in India in 2012 and this Kayaba - Yamaha jointly owned manufacturing company started manufacturing shock absorbers in India from May 2015. According to their inauguration press release they planned to produce 284000 shock absorbers in 2014 (didn’t materialise as production started in May 2015) and to take it to 1,600,000 shock absorbers in 2018. We need to keep a close eye on how these developments affect Gabriel.
The Raw Material is commodity so we don’t expect much competitive bargaining from suppliers.
At present price, stock is trading around PE of 22 and EV / EBITDA of 13 (appx).
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