Harita Seating Systems Ltd. (M. Cap 510 cr)


(Harshit Goel) #1

Harita Seating is a TVS Group company and is the leading manufacturer of seating systems in India. Harita specialises in manufacture & supply of safe, ergonomic and reliable driver seats and bus passenger seats. Harita seats are used in the automotive segments of: Commercial vehicles, Tractors, Off-road vehicles and Buses. Company has 5 Plants: Hosur (Tamil Nadu), Chennai (TN), Ranjangaon (MH), Dhadwad (KTK), Pantnagar (Uttarakhand). Harita has a subsidiary company (51% share of Harita Seating), Harita Fehrer Limited (HFRL) which is a joint venture between Harita Seating Systems Limited , and F.S Fehrer Automotive GmbH , one of the market leaders in automotive foam business in Germany, Europe. Company has a good client base and supplies to almost all the major players in the industry.

HFRL is a material un-listed Indian subsidiary. During the year, HFRL achieved a turnover of Rs. 506.37 cr and PAT of Rs.23.45 Cr. HFRL contribute majorly to the consolidated revenue and profits. JV was formed in 2009 and in 2010 Harita Seating transferred it’s the two wheeler seats, Long Fibre Injection (LFI) & Micro Cellular Urethane (MCU) products and the foaming businesses to HFRL for a sale consideration of Rs. 46.50 Cr which was settled partly by way of allotment of 1,02,00,000 equity shares of Rs.10/- each at a premium of Rs.17/- per share amounting to Rs.27.54 Cr in the equity capital of HFRL and the balance consideration of Rs.18.96 Cr by way of cash, both aggregating to Rs.46.50 Cr. HFRL allotted 68,33,364 equity shares of Rs.10/- each for cash at a price of Rs.101.54 per share (including a premium of Rs.91.54 per share) aggregating to Rs.69.39 Cr to its foreign collaborators, namely Fehrer on 8th February 2010.

Financials & Valuation

15%20PM

During FY18, the Company posted a growth of 26% in overall sales. Company’s sales grew in the commercial vehicle segment and in the bus passenger seats better than the market growth. From 2013 to 2018 Sales have grown at 10.90% cagr, EBITDA growth at 15.94% and Net Profit at 25.93% cagr. At CMP of Rs. 640 company has a Market Cap of Rs. 510 cr and Enterprise Value (EV) of Rs. 525 cr. On the basis of FY18 numbers company is available at PE of 13.42 times and EV/EBITDA of 8.46 times which is quite reasonable in comparison to other auto ancillary companies.
Company has seen good growth in exports in recent times and it is hopeful of continuing this growth in the future. Export sales grew by 105% in current products and new products customers. The Company has been continuing its efforts to increase the current volume of export of tractor seats to USA and Germany.The Company continues to strengthen its position in export markets and has won significant new orders from overseas customer. The supplies are scheduled in 2018-19. In the case of domestic tractor segment, the Company catered to the existing base of customers and experienced 32% growth. What’s also impressive to see is the company’s increasing expenditure on R&D from Rs. 3.9 cr in FY13 to Rs. 10.78 cr in FY18.
Company has done capex of Rs. 75 cr in the past two years which is quite substantial in context of the company’s total assets. This will help in maintaining the current sales growth in the near future. Company’s ROCE has improved substantially in the past 3 years. Increased capex and improved ROCE are very good signs.

Risks

  • Chairman of the company is Mr. H Lakshmanan and he is 85 years old, so succession risk is there. This risk is mitigated by the fact that the company belongs to the TVS Group and also in FY15 company appointed a full time CEO, Mr. A. G. Giridharan is the CEO of the company since 2015.
  • Company’s performance is dependent on the automotive sector, it’s cyclical in that sense. Company suffered losses after the economic meltdown in 2008 and took considerable time to recover.

Few Important Questions.

  • What is the market size? Who are the other players in the market?
  • Capacity of Harita Seating in various segments?
  • Segment wise sale in Passenger Bus Segment, Driving Seats, Two Wheelers and Tractor segment?
  • Nature of sale contracts company does. Are these long term supply contracts or Order based?

Regards
Harshit

Disclosure: Invested (Invested in last one month)


#2

A newbie investor here. I do not know anything about the market size or the other players, but I have seen Harita seats in both private travel buses and public transport buses. Good seats with good finishing and at the back you see the logo Harita. After seeing them in a private bus, I had even looked at the stock but did not proceed further.


(rupaniamit) #3

@harshitgoel - thank you for starting a thread on Harita Seating Systems!

Both Harita and Bharat Seats showed up recently when I was running some screens but I am yet to dive deeper. Both have shown excellent improvement in operational and return ratios in last 2-3 years. From a high level - it seems like they have reached optimum scale where operating leverage is kicking-in well. I was concerned whether Harita’s future margins and return parameters would be sustainable in long-term.

Had few questions for you:

  1. Any insights confirming sustainability of exports growth?

  2. What’s your take on it being a B2B play with possibly no pricing power and it’s customers having good bargaining power which would keep its margins in-check?

  3. By any chance did you review Bharat Seats? How does it stack-up against Bharat Seats and how is the competition landscape/intensity?

Thanks,
Amit


(Harshit Goel) #4

@rupaniamit
Hi Amit.

  1. On Exports: I have attached the following chart of the export data of Seats used in Motor Vehicles. As we can see that the exports have increased considerably in terms of quantity in the past one year. And this trend is continuing in the current year also in April-June 2018. What will be the exports in future is anybody’s guess but for now it looks sustainable atleast in the recent data available. Also company mentioned in it’s AR 2018 that " company has won significant new orders from overseas customer. The supplies are scheduled in 2018-19". Considering the pedigree of the management (TVS Group), I am taking management’s word on exports.

  1. Comparison with Bharat Seats: Not directly comparable to HSSL as HSSL is majorly operating in Passenger Bus, Tractors and 2 wheeler, Foam Business (in subsidiary HFRL) and Bharat Seats Ltd. (BSL) manufactures seats for 2 wheelers and 4 wheelers. Also HSSL works for a number of clients Tata, Volvo, Ashok Leyland, Mahindra, John Deere, etc whereas BSL works only for Maruti Suzuki Ltd. Business model of both the companies is different though they both operate in the same business area of manufacturing seats for automotive industry. There is a remarkable difference between the R&D spend of both the companies. R&D spend for BSL for FY18 and FY17 was Rs. 2.34 cr and Rs. 4.11 cr respectively forming 0.23% and 0.44% of sales for FY18 and FY17 respectively. R&D spend of HSSL is on higher side at Rs. 10.78 cr forming 1.22% of sales for FY18.
    Diversified customer base, diversified product profile and technical superiority (due to higher R&D spend) represents better bargaining power and resulting superior margins of Harita Seating over Bharat Seats Ltd.

  2. On B2B play: Yes company is in B2B play and hence the risks associated with the B2B model are all applicable to the company. What’s interesting is that company claims to be leader in few niche segments like passenger bus and tractors. Also other auto ancillary companies which are leader in their respective areas are trading at much higher valuations. Most of the auto ancillary companies generally cater to any one particular OEM group but HSSL has a diversified customer base. So what’s interesting me the most is the growth in automotive numbers in India and discount to peer valuation.

Regards
Harshit


(manivannan.g) #5

I live in Bangalore, I used travel quite frequently. What I’ve observed so far is, almost all the Volvo and Scania buses I travelled has “Harita” branded seatings, which is quite interesting. One question would be does the wear & tear repairs comes back to harita (kind of contracts ?) or is it upto the travel agencies (including State Transports) ? Also, do they sell parts to fix the broken seatings ?


(Dinesh Sairam) #6

I’m just leaving this here. @varadharajanr asked me to look at Harita Seating Systems briefly after the SEBI re-classification fiasco. Long story short, here’s how I valued the company:

Personal Valuation

This one uses a 15% Discounting and a 30% Margin of Safety. This is how I usually value companies i.e. I need at least a 15% returns and on top of that, require at least a 30% Margin of Safety to ensure that my assumptions going wrong doesn’t jeopardize my required returns.

Market Implied Valuation

This one uses a Cost of Capital based on the CAPM (13.61%) and the Mos is minimal (10%). This shows the company in great light at current valuations.

(Harita Seating Systems Beta Calculation.xlsx (30.6 KB), if anyone is interested in that sort of thing)

But take this post with a spoonful of salt, since I have done only a cursory research of the company’s Annual Report. I plan to write a blog on Valuing the company later, when time permits (And when I’ve done enough research to justify a decent valuation). I just thought to give the VPers a little heads-up. :wink:


(prakashagwani) #7

Thanks for the write up Dinesh.

It is very informative and interesting

Regards


(Vivek Gautam) #8

Thanks for starting a thread on Harita which seemed to be long overdue. I like the company due to

  1. Excellent promoter quality.One can blindly bet on very ethical and hardworking TVS group with a good reputation built over last several decades.

  2. Execution track record of TVS group and Harita seem to be good.

  3. Key here is the valuable subsidiary Harita Fehrer which is mostly catering to exports thus opp size gets multiplied from India focussed operations. With low labour cost in India and rupee depreciation,good connects of the foreign collaborator future n opp size looks bright. Hence instead of qtrly results focus shud be on yearly results when consolidated results are dispalyed.Any price fall due to poor qtrly results leading to price fall shud be lapped up like after q1 fy 19 results IMHO.

  4. Good clientele,ROCE CAGR and low valuation gives good MOS to this high quality auto ancillary and exports story.


(Vivek Gautam) #9

Some of the dated articles covering Harita.

Harita Seating Systems Ltd (HSSL), part of the $7-billion TVS group, manufactures automobile seats. It has a subsidiary company, Harita Fehrer Limited which is a joint venture between HSSL and FS Fehrer Automotive GmbH, one of the market leaders in the automotive foam business in Germany. Established in 2009, Harita Fehrer has emerged as a leading supplier of polyurethane to the automobile industry in India.

HSSL has five manufacturing plants, two in Tamil Nadu and one each in Maharashtra, Karnataka and Uttarakhand. The product range includes three types of driver seats (commercial vehicle seats, off road vehicle seats and tractor seats) and four types of bus passenger seats (inter-city bus seats, inter-state bus seats, urban/city bus seats and standard bus seats). These seat types have further options under each category. The company’s customers include Tata Motors, Ashok Leyland, Mahindra, Nissan, Bharat Benz, Hyundai, Marcopolo, Scania, Volvo, L&T, Kobelco, John Deere, Tafe, etc.

For the quarter ended December 2016, HSSL’s stand-alone sales grew by 14.71% year-on-year (y-o-y), to Rs84.54 crore, the stand-alone operating profit grew by 18.34% y-o-y, to Rs6.71 crore and the stand-alone net profit shot up by 38.35%, to Rs6.53 crore.

For FY15-16, consolidated sales grew by 10.05% y-o-y, to Rs636.94 crore, operating profit jumped by 41.19% y-o-y, to Rs50.7 crore and net profit grew sharply by 192% y-o-y, to Rs25.93 crore, from Rs8.88 crore in FY14-15. During FY15-16, the company sold off its Nalagarh unit in Himachal Pradesh and made a profit of Rs4.5 crore on the sale. This money has been used to reduce the debt.

The debt:equity ratio of the company for FY15-16 stood at 0.02, down from 0.37 in FY14-15. With the reduction in debt, the finance costs have decreased, thus adding to the net profit. The cash earnings per share (EPS) grew to Rs51.16 in FY15-16, from Rs28.60 in FY14-15. Both of the returns ratios, viz., return on capital employed (RoCE) and return on net worth (RoNW), have increased to 45.61% and 26.88% respectively, in FY15-16, up from 25.64% and 11.44% in FY14-15.

Since the company doesn’t give out consolidated quarterly data and the stand-alone data accounts for only 50% of the total sales, the valuations on the trailing 12-month basis cannot be arrived at. The management has been consistently giving out dividends for the past five years and has recently announced a second interim dividend of Rs3 per share (30% on the face value of shares) in March 2017.

The promoters hold 66.35% of the total shares; the rest is held by the public. The stock rose to its 52-week high of Rs790 on 3 November 2016 from its 52-week low of Rs480 on 9 May 2016. It was trading at Rs730 on 4 May 2017.

According to the automobile industry report by ibef.org, passenger vehicle production in India is set to grow at a compounded annual growth rate (CAGR) of 30.96%, from 3.4 million in FY15-16 to 10 million in FY19-20. Automobile exports are projected to grow at a CAGR of 3.05% during FY16-20. Commercial vehicles production is expected to register a CAGR of 35.5% during FY16–20. Two- and three-wheeler production is projected to expand at a CAGR of 15.4% during FY16–20. This increase in production and sales of automobiles will help HSSL.

HSSL, in collaboration with the department of design engineering of the Indian Institute of Technology-Madras, has integrated sensors in the driver’s seat. The data derived from these sensors can be used for in-vehicle information of status as well as help fleet owners in not only tracking drivers but also training them in safe driving practices.

HSSL is currently in talks with state transport undertakings, fleet operators and commercial vehicles manufacturers to install the technology.


(Vivek Gautam) #10

harita CM DEC 17.pdf (240.8 KB)


(Vivek Gautam) #11

1515580164HSL PCG - Pick of the Week - Harita Seating _ 08 Jan’18.pdf (461.0 KB)


(Vivek Gautam) #12

2018 AGM Notes for Harita

Meeting presided by Mr. H Lakshmanan, chairman, while the CEO, Mr. Giridharan (quite young - probably mid 40s?) sat at the extreme end of the table. A little strange - almost all the questions were answered by chairman, except for a few operational details here and there provided by the CEO. So, the CEO seems more like a COO. Had a positive impression on him during my brief interaction at the end of the meeting however. Very good hold over the business.

  • LCV growth at 20%, with MHCV at a growth of 11%. Bus segment degrew by 19% (have alluded to bus manufacturers getting into seating so maybe because of that). Tractors grew by 20%.
  • They follow OEM guidance when it comes to planning capacity. Based on OEM projections, they make their plans.
  • No new customers in 2017. Total OEM customers is 25. In the bus segment - over 200 customers (mostly the travel companies). Unlike OEM, they may not be high-touch customers - may not come back every year with orders.
  • Customers are OEMs &STUs (Straight transport units, including bus travel agencies etc). OEMs are more volume business, STU is more margin business.
  • Harita Fehrer will soon do more 2 wheeler exports to Germany, China. 2 wheeler seats are foam seats so business has to go via the subsidiary. Harita supplies 2 wheeler seats to TVS, so there may be questions of adding more 2 wheeler OEMS such as Hero (who may be reluctant to give business to a TVS group company).
  • Standalone market share data: CVs: 45%, bus 12%, tractors: 37%, off road vehicles: 37%.
  • Aftermarket spares is a very small part of the business - just 3%. 3 distribution methods - OEM dealer network ,OEM spares dept, in house small dealer network. Spares business is low since owners don’t usually drive the vehicle.
  • Capacity utilisation as a metric doesn’t make much sense as a particular bus seat model can have 5x the realisation of another bus seat model. They can make up to 2.2 million seats, but revenue depends more on product mix rather than volume. Currently 70% utilised.
  • From start to finish, it takes about 15-18 minutes to make a batch of 80-120 seats.
  • Railways business - they are seriously looking at it (but am not sure how many years they have been promising the same…others who have tracked the stock longer can comment?)
  • They passed through a very difficult period 5-6 years ago, and this seems to shape their thinking even today. Could be a management that errs more on the convervative side vs aggressive side (my impression).
  • Axle payload norms to have no impact on business.
  • WIP refers to the welding which was outsourced that is now being taken in house. Done for quality & quicker turnaround.
  • Raw material increase is passed on on a quarterly basis.Renegotiation is factored into OEM contracts. Every quarter, they will beg and follow up with OEMs, and eventually get the pass through. It takes time, but happens. The increases are valid for a quarter.
  • Chennai plant supplies entirey to DICV (Diamler India commercial vehicles). DICV was incidentally unable to compete with Leyland and TAMO, hence has shifted to an export model. They import CKDs from Daimler Japan, assemble in India and export to Middle East/other markets. They are now looking to localise more production here in India by pushing their suppliers.
  • Market share with Ashok Leyland is 97%.
  • Their plant will either supply to the OEM (in the case where the OEM has the ability to do cabin manufacturing/FAS [Front and structure]) or to a subcontractor (Surin, Prabha auto, ACCL etc).
  • Fehrer representative (from founding family) seemed quite happy with local partner. This seems to be a small piece for this overall, but they seem to be happy to continue with existing arrangements.

(Vivek Gautam) #13

2016 Harita AGM Notes

Harita Seating AGM Notes:

  1. Harita management looks Very honest & simple like any other Sundaram group
  2. Chairman Mukundan & CEO Giridharan Answered questions
  3. Retail investors requested for bonus or split. Management will consider in due course of time in board meeting.
  4. Good growth in medium & Heavy vehicles (MHCV). FY15-16 recorded growth of 28.2%
  5. LCV growth for FY 15-16 = 2.6%
  6. Bus segment growth = 15.1%
  7. Tractor segment registered a decline of 6.9% but due to good monsoon revival in tractors sales is expected in next financial year i.e. FY16-17.
  8. Highest ever sales in 2015-16 = 308 CR
  9. Highest ever profit = 28.5 CR
  10. Increase in contribution due to favorable products mix
  11. Softened raw material cost
  12. Cost savings initiatives like power
  13. Dividend income of 6.15 CR from subsidiary Harita Ferher
  14. 4.47 CR profit from selling of 2 wheeler business in Himachal Pradesh
  15. Paid total 6 rupees dividend for FY 15-16
  16. FY16-17 MHCV to register 15+% but LCV growth may remain flat
  17. Tractor segment may see good revival due to favourable monsoon this year.
  18. No plans to change name from Harita seating to TVS Seats.
  19. Hosur plant contributes 50%, Pune Plant 23%, Pant Nagar, Dharwad, Chennai 7% each
  20. Reduction assets due to sale of HP plant.
  21. CSR is mandatory so company, CSR for Fy15-16 = 60+ lakhs.
  22. Aunde India has a tie up with Faze three exports for Automotive fabrics and they have manufacturing facility in Dadra. After take over of Fehrer by Aunde, will there be any business overlap between Aunde India and Harita Aunde? Harita Management consider this as positive as new products range of Aunde available for Ferher hence Harita-Ferher JV.
  23. Retail investors requested for plant visits like other sundaram group of companies. Management assured to consider this point.
  24. Retail investors requested for corporate video to displayed during AGM like other Sundaram group. Management assured to consider as per group policy. Retail investors also requested to upload videos in YouTube & company website. Again it will be as per Sundaram group policy.
  25. Top Customers of Harita seating are Ashok Leyland, Tata Motors, TAFE, Daimler.
  26. Ashok Leyland supplies Stallions class to Indian Army and Seats are supplied by Harita. Also Seats to Tata Motors for defence segment. Good growth expected here.
  27. No progress in Railway sector. Looks like company is not interested
  28. Raw material cost is 28% but they are passing on benefits to customers whenever reduction in raw material.
  29. They produced 12+ lakhs seats
  30. Replacement market for seats is small except few spares.
  31. Retail investors pointed out that their subsidiary Harita Ferher is as big as parents therefore quarterly results can declared every quarter. Management replied that subsidiary results will be declared yearly based in group policy. Whenever there is change group policy then they will follow it.
  32. Any relation between Harita Seating systems and Harita Techserve which operates in automotive design service in Pune. Both belong to TVS Group but has Harita Seatings any commercial interests? No commercial interests beyond the fact that we do use Harita Tech serv for contract manpower for our R&D.
  33. How we are going to scale up in coming years and are we looking at any other products apart from seating systems ? There is adequate potential and growth that we see in the seating systems itself, and we will scale up in coming years. Since there is adequate potential, at this point we are not looking at other products apart from seating systems.
  34. What steps are being taken to enhance shareholder value? Since it took almost 10 years to stabilise manufacturing and come to optimum capacity. It is generally believed that in view of the good monsoon in the current financial year and rolling out of GST successfully, the business prospects of automobile industry is expected to grow. This augurs well for our business both in Harita Seating Systems Limited and its subsidiary. We hope to achieve better sales and profitability and should look forward to decent improvement in the networth of the Company.
  35. Most of the retail investors are Chennai based and they are invested in most of the Sundaram group companies. They hold Harita seating from long time and they enjoy liberal dividend policy of Sundaram group.
  36. Management politely denied any form gifts from retail investors.
  37. Management looks confident of delivering better results in future due to good monsoon & implementation of GST. AGM 2016 NOTES

(Akbar Khan) #14

Ratings upgrade for Harita from CARE
http://www.careratings.com/upload/CompanyFiles/PR/Harita%20Seating%20Systems%20Limited-09-06-2018.pdf


(Harshit Goel) #15

Good to see ratings upgrade of Harita.

Key points.

  • Major portion of the revenue of HSSL is from CV segment which accounted for 40% of the net sales during FY18 followed by bus passenger segment (22%), tractor segment (17%), Exports (15%) and remaining by off-road vehicle segment. (this bifurcation seems to be of standalone numbers).
  • HSSL reported strong income growth of 26% for FY18 supported by both growth in volumes and sales realization.
  • Segment wise, sales from commercial vehicle segment grew by 27.5% on strong demand from Heavy commercial vehicles (HCV) while sales from Tractor segment grew by 36.6% on strong demand due to good monsoon.
  • Export sales in FY18 almost doubled to Rs.63.3 Cr from Rs.31.8 Cr in FY17 due to strong orders from John Deere.
  • Growth from Bus Passenger Seats almost remained flat.
  • Any volatility in raw material prices like steel, foam etc. is passed on to the customers though with a time lag of few months.

Regards
Harshit


(Harshit Goel) #16

Following is the bifurcation of standalone sales of Harita.

Screenshot%20(4)

Does anyone have similar data for Consolidated Sales?

Regards
Harshit


(Dinesh Sairam) #17

FYI, I finally completed the full valuation of Harita. Thankfully, not much has changed since my original post. The market-implied Value is Rs. 849 (-6% from my last post) and my personal Value is Rs. 503 (-10% from my last post). Meaning, you can possibly buy Harita, but I probably won’t unless it drops further. Confusing? I plan to write the blog tomorrow (Hopefully), so I should be able to explain this redundancy there.

Here is the gist of my market-implied valuation as a range of probabilities:

Here is the file in case anyone is interested (Downloads can be made from ‘File -> Download As’):


(Dinesh Sairam) #18

This apart, while I was researching about the company, I couldn’t find out much about the quality of the products produced by Harita. But I did find out some reviews for one specific line of product (John Deere Tractor Seats). Of course, I have no conclusive proof that these are produced by Harita. However:

  1. The seats looks very similar to the ones displayed in Harita’s website
  2. Many of the comments mentioned that these seats are ‘bang for the buck’, so I am assuming they find it cheap because it is produced in India (By Harita).

All the reviews are positive. Besides this, I think we can all agree from personal experience that the quality of seats in commercial buses like Benz, Volvo, Scania and even local ones like BMTC are commendable.


(Vivek) #19

https://valuationinmotion.blogspot.com/2018/09/harita-seating-systems-valuation-buying.html thank you @dineshssairam for the detailed blog


(Manojlion) #20

@dineshssairam Sir many thanks for the detailed blog.

@harshitgoel Many thanks for starting the thread

I have also noticed seats in Volvo ,Benz and Scania ,being manufactured from Harita.My regular travel trips are from Bengaluru to and fro Chennai and Bengaluru to and fro Hyderabad.

Has anyone travelling in North India noticed the same ? Just want to understand if there is different seat manufacturer(eventhough not listed) apart from Harita Seats and Bharat Seats