Why Sansera Engineering is a good IPO bet

ET Intelligence Group: Sansera Engineering, a maker of precision forged and machine components, is planning to raise Rs 1,283 crore from an initial public offer. The entire issue is an offer for sale by private equity investors (Rs 1,002 crore) and the company’s founders.Long-term investors may subscribe to the IPO, given the company’s track record of outperforming two-wheeler industry growth, and a rising share of technology-agnostic components, that may help the company to capture the opportunity arising from the electric vehicles segment and also expand the non-auto revenue contribution.Business ModelBengaluru-based Sansera Engineering is the largest supplier of connecting rods and rocker arms for two-wheelers and passenger vehicles.The company generates half of its revenue from leading two-wheeler makers such as Bajaj Auto, Honda Motorcycle and Yamaha and around 24% from passenger vehicle makers such as Maruti Suzuki, Toyota Kirloskar and Honda Cars. The remaining comes from commercial vehicle makers and the non-auto segment — aerospace, agriculture and off-road.In 2020, Sansera had a global market share of 2.3% in connecting roads from 0.9% in 2015 as several automakers that were making engine components in-house, outsourced them due to shrinking product lifecycle and cost competitiveness.Consequently, the global market share is expected to expand despite the shrinking share of the internal combustion engine segment. Besides, the company is focusing on the technology-agnostic components space. A dedicated new facility for hybrid and electric components at Bengaluru is likely to be commissioned in the current fiscal. It has also bagged orders for e-axles for electric scooters from a leading start-up company. The content per vehicle from the e-scooter maker is around ₹300 higher than the mass market scooter.FinancialsThe company’s revenue grew at a rate of 6.7% to Rs 1,549 crore in FY21 and remained in this range over the last three years despite the two-wheeler industry volumes witnessing a sharp drop. Around 15% of revenues came from new businesses. Profit rose 36% year-on-year to Rs 109 crore in FY21. The revenue growth outperformed the domestic component average by 500 basis points between FY16 and FY20 on higher wallet share, the addition of new customers and higher content per vehicle. The company’s operating profit (Ebitda) margins were in the range of 16-29% during FY19-FY21 with debt-equity improving to 0.55 from 0.81. 86149522Risk FACTORsSansera is highly dependent on a key customer — Bajaj Auto — that contributed 21% to total revenue. The top five customers accounted for 59% of the total revenue. Any loss of revenue from this pack can materially impact cash flows. Besides, connecting rods make up nearly 40% of revenue. Technological obsolescence in this component segment could impact performance.ValuationAt the higher end of the price band, the asking price-earnings multiple is 34 times FY21 earnings, while Sansera’s peers are trading in a range of 25-155 times on the basis of historical earnings. The company’s installed capacities being largely fungible to counter technology changes due to electric vehicles and its focus on expanding the technology-agnostic portfolio may help the valuation to rise higher than the sectoral average.

from Economic Times https://ift.tt/3E9mAi3