Shriram Pistons & Rings Limited (SPRL) is the leading manufacturer of Pistons, Piston Pins, Piston Rings, and Engine Valves in India, with the exceptional lineage of the Shriram Group one of the most reputed Industrial houses in the country. Its products are marketed to almost all renowned OEMs and Aftermarkets under the brands SPR and USHA, catering to both domestic and international markets. SPRL deploys most modern manufacturing equipment and processes, using state-of-the-art R&D Tech Centre, which is supplemented with continuous support from its global technology partners.
Tech Partnerships:
The company has long standing technology partnerships with Global Majors, it uses world class technology and also has its in house technology center. It customizes the technology to local conditions and then manufactures at scale for all major OEMs in India and Abroad.
Source: SPRL Concall
Business Segments:
The company has a diversified revenue profile with no customer concentration and although majority of the business is linked to the global auto sector and is subject to cyclicality, its aftermarket and non-automotive business provide support in a downcycle.
Source: SPRL Concall
The current TAM for aftermarket business is 100m vehicles which would require regular refurbishment requirements and it sells its products through the USHA and SPR brand.
Competitive Intensity:
SPRL has dominant position and is a leading player in the piston, piston pin, piston ring and engine valve industry.
Source: Fitch rating report
Business Developments:
EMFI acquisition:
In anticipation of huge demand for motor and motor controllers they have done an acquisition of EMFI and currently have 0.5million capacity for motors and controllers annually, positioning them to meet the surging demand for these components and capitalize on the growing electric vehicle market across two, three, and four-wheelers.
The current TAM for motors and controllers is huge and SPRL has a history of partnering with global tech leaders customizing their tech in its tech center to meet Indian standards and then producing them at scale and using its existing relationships with OEM and distributors to sell them worldwide.
Source: SPRL AR
Now if we look into SPRL’s competitor Mahle, it was the supplier of mid drive hub motors to Ather. Ather in its DRHP has mentioned supplier concentration risk which suggests that there no major auto ancillary company that can supply good quality motors and controllers for EV applications.(Did some scuttle butt with an engineer who works at Ather).
Source: Ather DRHP
Source: Ather energy
After battery, motor and controllers is the second biggest cost in the BOM. SPRL can capture a huge market, currently OEMs are looking to de-risk their supply chain and thus it can capture market for the existing EV models as well.
Takahata acquisition:
Strengths:
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Sole supplier to Bajaj for supply of piston and valves for their CNG bike freedom 125.
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It currently has 90% market share for piston and piston rings in CNG engines.
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The company has anticipated change in advance with respect to change in technology from BS4 to BS6 and are actually leaders in providing solutions to their customers(OEMs).
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Even after transitions to multiple new reforms and also witnessing a downcycle in the auto industry, SPRL has been able to maintain 55-60% gross margins and has always maintained double digit OPM.
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With a cash rich Balance Sheet the company is well positioned to do acquisitions which would be margin accretive. It also has been able to consistently increase its OPM for the past many quarters.
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It has renewed its technical collaboration agreement and also the supply overhang is gone as KS Kolben has sold its 20% stake.
Source: SRPL AR
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Ability to withstand technology change:
Key triggers:
- Government has recently come with a draft scheme for promotion of LNG based mobility
draft-Scheme-for-promotion-of-LNG.pdf (368.6 KB)
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Growing demand for hybrid vehicles potentially increases their content value per vehicle:
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Capability to supply for E85 fuel, thus benefitting from the government’s thrust towards ethanol blending in fuel and promotion of flex fuel vehicles.
Indian auto companies will soon produce 100% ethanol-run cars and 2-wheelers: Nitin Gadkari - The Economic Times
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Key players like Adani Total Gas exploring retrofitting ICE engines to run on alternative fuels like CNG and LNG, shows vision of top players aligned with government and also shows progress in establishment of an ecosystem for adoption of alternative fuel systems.
Risks
- It has been consistently able to improve its OPM for the last few quarters due to operating leverage and productivity gains, thus it is operating at highest OPM currently, in a downcycle operating deleverage will reduce its profitability.
- SPRL has been a leading player in piston, piston pins, piston rings and engine valves, with their foray in precision plastic moulding and EV motors and controllers it carries significant execution risk in an area where their experience has been very limited.
- Management is keeping significant cash in its Balance Sheet for acquisitions instead of doing a buyback, diworsification in unrelated businesses can cause capital misallocation.
- Faster adoption of EVs can cause terminal risk to its core business.
Valuations:
The company is currently trading at EV/EBIDTA multiple of 12.5x and P/E of 22x
Despite the company’s consistent outperformance of the industry and its robust cash flow, its valuation remains undervalued due to concerns about the long-term viability of internal combustion engines (ICEs) in the face of electric vehicle (EV) adoption. Thus it trades at a comparable multiples to Sharda motors. However, strategic acquisitions and a shift in product mix could significantly enhance its future prospects and lead to a rerating further.
Disclosure: Hold a tracking position
