Steel Strips Wheels Limited - Attractive Valuations

Q&A: Questions & Answers
248

SSWL is a leader in designing & manufacturing Automotive wheels – both Steel & Alloy Wheels category

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By FY24 end, 70 Lakhs Steel Wheel capacity to be added in phased manner, post-acquisition of AMW Auto Components Limited
Alloy Wheels Capacity to be expanded by 60% i.e. 18 lakh Wheels at Mehsana Plant, Gujarat

Exploring various avenues to foray into EV Segment

Sales Mix Shift Shift of Sales Mix towards High Margin Accretive Segments – Alloy Wheel & Exports

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Steel Wheel Market to grow at 8% p.a. whereas Alloy Wheel Market to grow at 12% p.a. over next 5 years

Margin differential between alloy wheels and steel wheels is approximately 700 basis points

Strengthening Balance Sheet thereby Improving Return on Capital Employed & Return on Equity

INR190 crores spent on capex in H1 FY24

Total capex for FY24 expected to be around INR320 crores

NCLT order for acquisition of AMW Auto Components Limited for INR138 crores

Total expected capex for AMW acquisition is INR158 crores

AMW plant in Bhuj expected to become commercially operational by Q1 FY25

Expanding capacity for Steering knuckles with a total capex of INR200 crores

Revenue potential of INR220-250 crores By July FY24

Revenue guidance for FY24 is INR4,500-4,700 crores

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249

The con-call of Steel Strips Wheels was interesting. I will add some pointers soon.

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Here are some of the updates from Con-Call Q3 FY24

Business Highlights:

  • Total Capex Expenditure for 9 months: INR 255 Cr
  • Full-year FY24 Capex: INR 470 Cr
  • AMW has become a fully-owned subsidiary.

Other Updates:

  • Maruti and Hyundai are entering an annual shutdown to clear inventory.
  • Alloy wheel export projection for FY24-25: 2.4 to 2.5 lakh wheels, generating 100 Cr in sales.
  • Anticipated 70-80% growth in volume for the next year.
  • Target for next year’s export sales: INR 180 Cr.
  • The deal with the Israeli company is on hold due to the ongoing conflict.
  • In the EV segment market share, Tata holds 63-65%, with Hub Motor wheels accounting for almost 60%.
  • Regarding EBITDA margins on the export side, there is freight volatility due to the Red Sea conflict, leading customers to request a CIF basis. This has resulted in a 20 Cr increase in topline, necessitating payments to vendors accordingly. Raw steel prices have increased by 2 rupees/kg.
  • Margin profile is expected to improve.
  • Production for the Knuckle business is set to commence from July '24 to August '24.
  • Future EBITDA margin expectations: Current 256 rupees per wheel. Due to a favorable mix, this is expected to continue increasing.
  • This export will be 500-600 cr.
  • The next year’s target will be 700+ cr.
    *Revenue growth from EV - 30K-40K wheels for Two-wheelers/per month.
  • On Debt - Overall Interest rates moved up which has an impact on the interest part, and the current year’s borrowing increased due to advancing the capex. The repayment will be faster starting from the next year.
  • Reason for low Tax rate - shifted to the new regime hence it is low. The tax rate will be 25% going forward.
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251

also to add on in above highlights

1- capex for the next year to be around 180cr, which will be funded by internal accruals only.
2- additional capacity of 1.8million alloy wheels to commercialised in Q2 FY25.
3-revenue guidance for FY25- close to 5000 cr.

i think management are conservative regarding next year outlook.

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252

The management spent ~ 130 crores on acquisition of AMW which is mainly into steel wheel manufacturing. I am assuming the operating margins of steel wheels is around ~ 5% looking at the competitor Wheels India’s margins (which is mainly into steel wheels). Wonder why management would invest in low margin business? This is also contradicting with the management’s statements from July concall -

Blockquote
This happened mainly because we gave up a couple of businesses of Maruti which were at a very, very low value addition. So, we didn’t want to focus on a business that was giving us 4% to 5% EBITDA. And I understand our competition did take that business, but as you can all see, reading from his balance sheet that he is also losing money in all his passengercar steel wheel business. It’s something on which we have taken a conscious call to not take any low EBITDA of margin business.

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@Sat

This acquisition dosent necessarily have to be a low margin providing business. SSWL has been running 100% utilization for large steel wheels i.e Trucks and tractors, there is demand which company is falling short to meet. To meet this demand company would have been forced to do capex ( greenfield ) which for a 50000 large wheels would have cost the company ~ 100 cr . The ASP
per wheel of ~ Rs.1400 is a blended mix of all types of wheels that can be produced at AMW facility if the company decides to only manufacture large wheels than the ASP will reach in access of Rs.4000 .
The company acquisition of AMW benefits in following ways
• De-risk from doing large capex on the steel side
• AMW has a land bank of 61 acres
• Multiple lines that can manufacture different wheels for 2 wheelers, 3 wheeler, 4 wheeler, Tractors and Trucks
• Meeting any demand scenario for any wheel type
Hope it was helpful.

Note : Company has also received ROQ from Maruti and management is hopeful of getting a breakthrough in coming quarters . Q4 will be interesting to look at

Disc : Not SEBI registered, not a buy or sell recommendation!

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Thank you for clarification, I missed this part from the latest concall. While margins was not my primary concern, it is the contradicting statements that was concerning. Looks like they are interested in CV & tractor business but not in PV steel business and this is inline with the statements made in July. I am not completely convinced that the margins are going to be significantly higher but we can wait and see to how this pans out.

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MARGINS IN CV AND TRACTOR STEEL WHEELS ARE HIGHER THEN PV SEGMENT, ALSO MANAGEMENT GIVES SIGNS ABOUT SLOW DOWN IN PV SEGMENT AS OEMs ARE LOOKING TO CLEAR UP THEIR INVENTORY. AMW PRODUCTION WILL FIRST START CV WHEELS AS THEY ARE ALREADY ON 95% CAPACITY UTILISATTION.

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KMP selling happening any reason

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10% YoY growth

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258

Even the promoter sold around 1% stake on 5th .
Should be a cause of concern

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Why should it be a cause for concern? Can’t they use the money for their personal use? Don’t they have the right to enjoy life, too?

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They absolutely do :slight_smile:
I think its important to find out the why the disposal, to be able to conclude rightly.

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Is it possible that the selling which we witnessed in recent past was to revoke the pledge of shares as per the announcement of the company to the exchanges?

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Steel strip wheels -

Q3 FY 24 concall highlights -

Sales - 1110 vs 938 cr ( export sales @ 174 cr, up 180 pc from 60 cr )
EBITDA - 117 vs 108 cr ( margins @ 11 vs 12 pc, down 100 bps YoY )
PAT - 60 vs 44 cr ( due lower tax outgo )

Current manufacturing capacity -

Steel wheels - 20 million to go upto 27 million wef Jan- Feb 24
Alloy wheels - 3 million to go upto 4.8 million in a phased manner - capex is in progress

No of plants @ 5

Tata steel holds 6.9 pc stake in the company

Nippon Steel and Sumitomo Metals together hold 5.4 pc stake in the company

Mkt share in domestic mkts -

PV - 42 pc
MHCV - 61 pc
Tractor / OTR - 42 / 70 pc
2-3 wheelers - 30 pc

Export sales for first 9 months @ 505 cr, up 130 pc from 220 cr LY

Export destinations -

US - 70 pc
EU - 26 pc
RoW - 4 pc

Steel wheels demand expected to grow at 8 pc CAGR for next 5 yrs vs 12 pc for alloy wheels

Alloy wheel contribution -

By volume - 15 pc
By value - 28 pc

Some popular models getting their alloys exclusively from the company - Carnival, Salvia, Creta, Verna, Aura, XUV 700, Magnite, Punch, Tigor, Kiger. Company enjoys 50 pc share wrt Sonnet, Venue, Nexon

Company enjoys > 50 pc mkt share wrt EV models of Mahindra and Tata Motors

Company expects alloy wheels, steel wheels sales to grow at 20 pc, 4 pc CAGR for next 2 yrs

At present, the company is doing an EBITDA of Rs 256/wheel. As the contribution from alloy wheels increases, this EBITDA/wheel should only go up from here on

Expecting to clock 4800-5000 cr of topline in FY 25. This yr, company should do 4400-4500 cr on the topline

Company completed infusion of Rs 138 cr into AMW auto components ltd via NCLT process. AMW is also involved in the manufacturing of steel/alloy wheels

Low tax rate for Q3 due company shifting to newer tax regime. Henceforth - yearly tax rates to be at 25 pc/yr

Seeing some slowdown in exports due to the Red Sea issue. At present, company is at max doing Rs 50cr /month of exports ( ie wef Jan 24 )

Company to undertake debt reduction wef FY 25 as a lot of capex is behind them

Expect alloy wheel production at 3.5-3.6 million wheels for next FY

Disc: hold a tracking position, biased, not SEBI registered

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Started reading about the company fairly recently and impressed by the stable margins, growth and guidance from the management… But looking historically, firm has always commanded a lower valuation compared to other auto anc. maybe due to steel commodity cycles… Now looking interesting as they are increasing alloy wheel capacity which is a higher margins business. Can anyone tracking the company give their views on whether the company can command fair valuations in the future since product mix is changing from commodity to alloy? I am expecting PE of at least 25 and valuation rerating.
Disc. not invested

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Wheels India which operates in the same business is trading at a PE of 30 with much lower ROCE and ROE. SSWL is much better return ratios and margins than Wheels India. The promoter had some portion of its shares pledged which have been released completely in the last quarter. However, this has not triggered in the share price movement.

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Yes… True…is there any negative on acquisition of amw auto components for balance sheet?

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Date: 16.04.2024
BSE Limited The National Stock Exchange of India Department of Corporate Services, Limited Phiroze Jeejeebhoy Towers, Exchange Plaza, Dalal Street, Plot No. C/1, G Block, Mumbai - 400 001 Bandra-Kurla Complex, Bandra (E);
Mumbai - 400 051 BSE Scrip Code: 513262 NSE Symbol: SSWL
Subject: Inks Alloy Wheel Supply Agreement with leading PV OEM
Dear Sir/Ma’am,
aluminum
We are glad to announce that we have successfully secured a maiden entry as a supplier of
testament
wheels to one of the top Passenger Car manufacturers in India. This milestone is a to our unwavering commitment to pushing the boundaries of innovation and delivering unparalleled value to our customers.
This reaffirms our strong rapport with our customers and our ability to meet and exceed their
aluminum
expectations. We’re honored to be recognized by the OEM as a strategic partner for supply of wheels besides Steel Wheels.
Looking Ahead:
We continue to remain laser-focused on the road ahead and are committed to leveraging this opportunity to drive even greater innovation, deepen our customer relationships, and solidify our position as a leader in the market. We extend our heartfelt thanks to our Stakeholders for their trust and to our team for their exceptional efforts and unwavering dedication.
Kindly take the above on your records please.

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Why have they not disclosed the name of the OEM?