Gabriel India Ltd. - Shock free ride?


(ramakanth) #1

Hi everybody,

I have been following this forum for some time as a silent spectator and I really admire the quality of discussions that take place here.

I came across Gabriel India recently and I was surprised at their wide presence in the Indian automotive market. This company is a member of the Anand group which is into Automotive and Hospitality industry, since 1961. Find below my take on this company and please put in your thoughts on this.

About the Company

Gabriel is in the auto ancillary industry (suspensions/ ride control products). The products they manufacture are

  1. Shock absorbers (2/3 wheelers, passenger cars, commercial vehicles)
  2. Front forks (2 wheelers)
  3. Struts (passenger cars, SUVs)

The ride control products are used for getting better comfort for the passengers and the drivers. They are initially installed during the manufacturing of the car and are replaced in the aftermarket if they are worn out or damaged. (The recommended kms before the struts need replacement – 80000 kms). Due to their heavy dependence on the auto industry, the revenues of these companies might follow the same Cyclicity as the auto industry.

Major part of their sales comes from OEM sale (> 80%) with a good number of reputed clients. They are now focusing on the aftermarket and export sales which were at ~15% and ~5% respectively. It is important to expand in the aftermarket segment as they would be able to obtain a higher margin from the business and also reduce their dependence on OEMs.

In the aftermarket channel they were able to grow by 15% in FY 15 showcasing their strong brand.

Raw materials consume a large portion of the costs, with FY 15 at 72.2% of the sales spent on raw materials.The company has 9 factories catering to various companies (OEMs). They have an installed capacity of 24 million shock and struts, 2.7 million front forks.They have a market share of 22% in 2 wheeler segment, 30% in passenger vehicle segment and 75% in commercial vehicle segment.

Financials

Link to bse page of the company

The PE looks on the higher side. I am still developing my quantitative skills and in no position to post inferences based on them. Interested people please put in you comments and thoughts on this company.

Note 1: I do not hold any stocks of this company as on date.
Note 2: This is my first post in this forum. If there are any breaches of the forum guidelines in making this post please do mention i will make a note of that.

Cheers!!


(Jigar Punamiya) #2

Nice find Ramakanth. I observed the following:

  1. Net debt free company.
  2. Has been increasing its sales consistently since last 10 years (except 2009).
  3. Have been consistently increasing its OPM.
  4. Dividend paying.
  5. Ratios look good.

Have to look whether this growth is sustainable.

  1. OEM Sales. I do not think the problem lies here as it is dealing with OEMs since years. only hindrance is cyclicity. Also, margins may get screwed in future due to lack of pricing power in this industry over OEMs.
  2. After market - I think after market is majorly captured by unorganised sector. Need to know if there is any major player in this market. Penetrating here will be difficult and will take time. However, if it does penetrate and increases its OPM from current levels, then the growth could be phenomenal.

Let’s take this forward.


(V) #3

Kindly see my analysis and report on Gabriel India published in Safal Niveshak blog a year ago. Valuation part is highly conservative and so take it with a pinch of salt.

http://www.safalniveshak.com/value-investing-contest-gabriel-india/

No holding in Gabriel.


(Jigar Punamiya) #4

A nice & detailed write up Venkat. Do you have any idea about the after market sales position of Gabriel?
market share number, margins, etc.?
For FY14-15, company after market segment grew 16% (domestic and exports). Company is also expecting this segment to remain robust.
I would like to know the percentage aftermarket segment contributes to total sales.

Thanks in advance

Edit: Details about aftermarket segment’s contribution to total sales is given in AR FY 14-15. I had missed the same before. The same is 11%


#5

Some thoughts on Gabriel -

  1. CAGR growth over the last decade - Sales 13%, Volumes 9%, Unit Prices 3%, Operating Expenses 13%. While Operating margins (excluding Other Income) have improved from ~3% in FY06 to ~6% at present, they have not passed on cost inflation to OEM’s.

  2. The company claims to have a 45% market share in shock absorbers. I cant get my head around this. If they have such a high market share why are operating margins so low? Is the high market share because of low prices or despite it? Many other auto ancillary companies have double digit margins.
    @Ramakanth where did you get the segment wise market share data?

  3. After - market is an interesting opportunity though not very large to my mind. My best guess is this is ~800 crs in size (see attachment). Have made crude and simplifying assumptions. In case anyone has a better understanding of this do weigh in.

  4. Venkat’s report suggests that there are only 3 major suppliers to OEM’s for shock absorbers. Which begs the questions, does Gabriel India have untapped pricing power? There aren’t many alternatives for OEM’s. Moreover it’s probably not in their best interests to keep squeezing good vendors. If Gabriel, hypothetically, raises prices 10% a year, what are the alternatives for OEM’s? There’s a good chance of Gabriel being able to raise prices without losing business volume.

What is the probability of Gabriel having ~2200 crs in sales and 12% operating margins in 5 years? Although I don’t understand the Auto industry well, I think its well above 50%.

Thanks.

Disclosure - I don’t own the stock. Trying to get more information before I decide to buy.

Auto Industry Data.xlsx (56.6 KB)


(vikas kukreja) #6

Hi Yash,
Great observation and nice points raised.
I being in auto Industry (in 4 wheeler OEM), can provide some first hand info on their business model.

  1. Their pricing power is not much in 4 wheeler segment. OEMs have many options to buy from, if not Indian, there are foreign suppliers with Indian subsidiaries like tenneco etc.
  2. Yes, Gabriel is increasing its market share, even in our company they are growing well, however on cost of margins. Simply coz they quote lowest price, they are chosen over others.
  3. They have lot of quality issues during development and their level of expertise is not up to level of other competitors.
  4. Their technical JV with Kayaba is not going well and is on verge of breaking.

However, if company get its acts together and focus on high margin products, it can become top notch auto supplier in future as it still has good brand image in OE market.
Management is no doubt good but they are choosing growth by compromising margins rather than focusing on value added products.

Disc: No holding in Gabriel.


(Jigar Punamiya) #7

Great Vikas! It is always helpful if a person from the same industry gives his/her inputs. I will check with my sources as well on this and get back.
Thanks.


(ramakanth) #8

Hi Yash,

good points raised. The source of my information on the segment wise market share is the IIFL report on that company and the annual report also mentions the same (not sure of the later).

@others: Thank you for taking interest in this company. Please continue sharing your thought on this. In the meanwhile I shall also add any news or analysis i come across.

Cheers!!


(ramakanth) #9

Hi everyone,

I was trying to look at the future sales forecast from a channel wise perspective and a few interesting things popped up. The table below summarizes my thought on the future sales growth. One word of caution though these are estimates that i have made based on very little experience, so i would suggest to take these numbers keeping that in mind.

First of all the sources from where i got these numbers:

  • The Aftermarket and Export numbers are from the investor presentation present in their website. The gross sales numbers from the consolidates sheet also present in the website.
  • Numbers in blue are the changes in sales of each of the categories on Y-o-Y basis.
  • The numbers in orange are my estimates on how the future growth of these segments will be.

My inferences from the above numbers:

  1. The aftermarket segment is not showing phenomenal growth as I believed after surfing through the annual report. On reading between the lines it was clear that the 16.2% growth in the after market was from domestic as well as exports. So if we tried to look at only the domestic aftermarket channel it was showing a growth of only 7% last year. this prompts the question, what about all the retailer program they were talking about?? aren’t they successful?? or was it just a one off year (i think that this is most likely, the reason for this is explained in point 4).

  2. The numbers in the export market are very erratic. Need to dig deeper into the markets and the reasons for this erratic behavior (any help in this will be much appreciated, especially the data part)

  3. The future growths, as mentioned earlier are my assumptions based on past data and you can correct me if you find them way off.

  4. The aftermarket part of automotive industry generally has a lag compared to the OEM numbers. The reason is that the vehicle needs to cover a certain number of kms before it goes to the local mechanic for repair or service (generally all OEMs have 1 to 2 year warranty period). Hence the fall in the aftermarket numbers in FY’15 could be attributed to the similar fall in OEM growth numbers from two years before (FY 13, 14). If this is true then this year growth numbers should also be in the single digits, but the first quarter numbers in this segment are encouraging and need to find out what went right.

This was an ongoing analysis from my part on the revenue side of the company. Please feel free to point out any mistakes or improvements that needs to be done to my analysis so that i might improve further.

Cheers!!
~NR93


(V) #10

Jigar, Unfortunately, I am not actively following this company for the last 1year.


(Vishnu Ch) #11

CONFERENCE CALL

Gabriel India

7th pay commission announcement will definitely have a positive rub off on auto industry

Gabriel Indiaheld a conference call on 29 January 2016. Manoj Kolhatkar, MD and Rajendran Arunachalam, CFO took the queries of the call.
Key Points of the call:

Q3was very good for overall auto industry. This is mainly because the festive season falls during the quarter. This was further added by lower fuel cost, low interest rates, and new launches.

In terms of volumes, there has been 3% overall growth in auto industry in FY 16 till date. The growth was mainly led by passenger cars, scooters and CVs. There was 10% growth in scooter volume sand 2% decline in motorcycle sales.

The announcement of the 7th pay commission will definitely have a positive ruboff on auto industry. It has happened in the past also.

The market expectations is that passenger car will continue to show good growth. Two wheelers depend on how monsoons pans out. CV s will grow at current rate.

Gabriel’s revenue was led byhigher volumesin PC, CVsegment andaftermarketchannel, which partiallycompensateddecline in 2WVolumes.

Falling commodity prices has helped in lower raw material cost.

But with falling raw material cost, product cost also had to be reduced and that itself was 1% which was the main reason for 1% drop in sales. There was growth in volume numbers in terms of PC and CVs but overall it might have been flattish.

The upcoming Auto Expo in February will help in volumes picking up further.

During the nine-month period, in terms of revenue mix breakup, 60% was from 2Ws, 27% from passenger cars and 13% from CVs vis a vis 63%, 26% and 11% respectively in previous year.

In terms of channel mix, company’s revenues were 84% from OEs, 12% from replacement market and 4% from exports vis a vis 86%, 10% and 4% respectively in previous year.

The company’s aspiration remains to form exports in double digits as percentage of total revenues but time frame cannot be committed.

Gabriel’s aim is to attain the double digit figure for EBITDA.

In the replacement market, the company’s share is 40% (putting all categories together).

Capex rangein range of Rs 35-40 crore will continue for the company.

The company’s market share is 25% each for both passenger cars and two wheeler segment and 75% for CVs.


(Vishnu Ch) #12

CONFERENCE CALL - from Capital Markets

The tax rate should be higher in FY 17 compared to FY 16

Gabriel Indiaheld a conference call on 20 May 2016. Rajendran Arunachalam, CFO took the queries of the call.

Key Points of the call:

  • FY 16 was good for overall auto industry. Though there was drop in some 2 wheeler sales, industry is waiting for the motorcycle segment to pick up.

  • Revenue in FY 16 was led by higher volumes in PC, CV segment andAftermarket Channel, partially compensated decline in 2WVolumes.

  • In terms of segment mix, 2W, passenger cars and CV s constituted 58%, 31% and 11% in FY 16 vis a vis 63%, 28% and 9% respectively in FY 15.

  • In terms of channel mix, OE, after market and exports formed 83%, 13% and 4% respectively in FY 16 vis a vis 85%, 11% and 4% respectively in FY 15.

  • Gabriel India reported 25% rise in net profit to Rs 75.2 crore. Sales were stagnant at Rs 1438.2 crore for the year ended March 2016.

  • Net sales for the fourth quarter ended March 2016 rose 5% at Rs 366.19 crore. The OPM during the fourth quarter ended March 2016 rose by 70 bps to 8.9%.

  • There will be no major greenfield capex for the year. Regular capex will be in the range of Rs 40 crore during the year FY 17.

  • Major growth drivers will be the industry growth in two wheeler segment. On back of good monsoon, management expects rural demand to pick up.

  • In the CV and PC segment, the management expects that current growth trend should sustain.

  • The 7th pay commission if executed, will definitely have a positive impacton overall industry.

  • Raw material cost declined due to product mix and commodity cycle decline.

  • Employee cost declined due to decline in employee numbers while sales have not grown that much.

  • The company’s D: E stands at 0.03.

  • Capacity utilization remains at 60-70% range in FY 16.

  • To achieve double digit EBITDA, the company declined to give any specific timeframe as it is a forward looking statement.

  • The company’s new orders came from following models:

  • 2W - Royal Enfield Himalayan, Mahindra Mojo, Honda Stunner

  • PC - Maruti Suzuki S-Cross, Maruti Suzuki Vitara Brezza, Mahindra KUV 100

  • CV - Mahindra Jeeto, Tata Xenon, Daimler Buses.

  • More than 50% of the company’s revenues was from two wheelers in last couple of years mainly led by scooters. The company is trying to mirror the change in industry sales trends.

  • On the export side, the company does not have much plan for inorganic growth.

  • The tax rate should be higher in FY 17 compared to FY 16.


(Aveek Mitra) #13

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).

Mandatory disclosures:

  1. It is not a recommendation to buy, sell, hold the shares. It is purely for discussion purpose for VP community. Please do your own due diligence and analysis before investing.
  2. Author has a favorable bias towards the company being invested in the stock from a lower level but no trading done during past 90 days.
  3. This stock is covered under Buy recommendation for paid members in https://aveksatequity.com, the website runs by the author and his associates. No advice given in past 30 days on this stock.
  4. No where the author has made any recommendation nor took any action of buying or selling which is contrary to the advices given to the paid members.
  5. Author is a SEBI Registered Investment Adviser (Regn no. 100004814)

(jainnitinp) #15

Fabulous results on all fronts - revenue, pat, ebitda and pat margins.
Revenue up 23%
PAT up 31%
Ebitda margin up to 9.9%
pat margin up to 5.2%


(Pratik Chandak) #16

any updates in 2018 apart from results?