Auto Ancillary

Commercial Engineers & Body Builders

Institutional Research
Recommendation CMP Target Nifty Sensex Key Stock Data Sector Reuters Code BLOOMBERG Code No. of Shares (mn) Market Cap (Rs bn) Market Cap ($ mn) 6 mth avg traded val. (Rs. mn) Stock Performance (%) 52 - Week high / low Absolute (%) Relative (%) Rs71/27 3M 125.1 127.5 6M 41.1 55.4 12M 58.1 74.0 (%) 54.96 22.87 7.34 14.83 Auto Ancillary CEBB.BO CEBB IN 54.9 3.8 73.3 5 NA Rs69 NA 4,850 16,165

Management Meet Notes

January 11, 2012

We returned positive after meeting Mr. Ajay Gupta, Executive Director at Commercial Engineers and Body Builders Co Ltd (Cebbco), a leading supplier of truck bodies to the commercial vehicle (CV) Industry. Cebbco is well placed to benefit from the move towards fully-built vehicles (FBV) within CVs given its first mover advantage and long-standing relations with Tata Motors. Foray into Railways should help in diversifying revenues and reducing client concentration. Cebbcos profitability is on a sharp turnaround following price hikes and ramp-up in volumes in FY12. Stock trades at 11.4x FY12E earnings (annualized 1H) which is attractive given growth momentum. Key risks include slowdown in CV demand and dip in orders from Tata Motors and Railways.

Well placed to capture shift towards FBVs

Cebbco is a leading independent truck body builder with an estimated 30% share of the largely unorganized outsourced body building industry. Bank finance for truck bodies and quality assurance from the OEMs are key demand triggers for truck buyers to shift towards FBVs from buying truck chassis. Within medium and heavy CVs, heavier truck sales are gaining momentum which should also aid a shift towards FBVs since OEMfitted FBVs are better designed. Competition from the organized segment remains limited and includes players like multinational Hyva and local player Utkal. Cebbcos first mover advantage and long-standing relations with Tata Motors remain a key strength.

Diversification of revenues should reduce client concentration

Cebbcos FY11 profits were severely affected by a shortfall in orders and delay in price hikes from Tata Motors, highlighting the risk to earnings from client concentration. Cebbco is now ramping up its Railways Business which, management estimates, has higher margins than truck body building. Cebbco, which does both wagon refurbishment and wagon manufacture, is setting up a new plant in Jabalpur to strengthen its bidding capabilities for Railways Business. Cebbco has also received orders from BHEL and L&T in the power equipment sector. Exposure to largest client, Tata Motors, (63% in FY11 v/s 74% in FY08) should hence come down further.

Shareholding Pattern Promoters FIs & Local MFs FIIs Public & Others Source: Company Sensex and Stock Movement
160 140 120 100 80 60 Sensex CEBBCO

Turnaround in financials drives rally in stock price

Following price hikes received in 1QFY12, coupled with ramp-up in volumes, Cebbcos 1HFY12 profits have already crossed FY11 levels and revenues should similarly cross FY11 levels in 3Q. This turnaround in profitability has driven a sharp 88% rally in the stock price in the past 3 months. Stock now trades at 11.4x annualized 1HFY12E earnings which appear attractive given earnings growth momentum. Capital efficiencies should also get a boost as cashflows improve. However, key risks include a slowdown in CV demand which could adversely impact demand for FBVs, order disruption from Tata

Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12

Motors and delayed orders and higher competition in the Railways Business. Table 1: Financial summary
Year to 31st March (Rsm) FY08A 1,192 22 1.7 FY09A 1,120 72 0.4 (75.3) 22.9 19.3 11.1 2.8 FY10A 1,829 65 4.7 1,053.7 40.7 33.0 FY11A 2,122 14 1.2 (75.1) 8.5 4.0 1HFY12A 1,973 203 3.0 Revenues PAT EPS (Rs) EPS growth (%)

Anupam Gupta anupam.gupta@hdfcsec.com 91-22-6171 7339 Sorabh Talwar sorabh.talwar@hdfcsec.com 91-22-6171 7321

ROCE (%) RONW (%)

Source : Company, Capitaline, HDFC Sec Inst Research

HDFC Securities Research is also available on Bloomberg HSLB <GO>

Commercial Engineers & Body Builders Management Meet Notes

Increasing trend towards FBVs positive for Cebbco
Traditionally, commercial vehicles (CV) in India are sold as chassis with the buyer (fleet/bus operator) adding the body from local garages/body building units, depending on the application of the CV. Body fabrication and building is a low-tech, labor intensive process and low-margin business for the Original Equipment Manufacturers (OEM). Hence, the CV body building industry is largely unorganized and fragmented. Poor build quality coupled with bad roads typically result in lower life cycles for the truck and higher maintenance expenses for the fleet operator. This trend is now changing in favor of Fully Built Vehicles (FBVs) for reasons such as a) higher tonnage trucks require better quality builds to sustain over long distances b) bank financing which was earlier limited to chassis is now available for bodies (produced by organized sector manufacturers) as well c) guarantees can be given by OEMs for the truck bodies d) In Budget 2003, the Government had levied an additional excise duty levy of Rs10,000/chassis (which could be offset by the body builder against the duty paid by the OEM), plugging the gap between local garages and independent body building units. From the OEMs perspective as well, outsourcing the body is cost effective and in cases where the final FBVs are sold at a higher price point margin accretive. Given that the industry is unorganized and unregulated, there is no industry data on the market size of body builders for trucks (ie goods carrier segment of medium and heavy commercial vehicles M&HCV industry). For an estimate of the same, we use annual truck sales and assume FBV penetration of 20% based on which we arrive at a size of around 60,000 units in FY12E. Hence, with increasing penetration, the market for the body building will grow faster than that of the truck industry. Table 2: Estimation of truck body building market size
(nos) Domestic M&HCV goods carriers - growth Penetration Market size - growth Source : SIAM, HDFC Sec Inst Research FY11A 275,235 36% na na na FY12E 302,759 10% 20% 60,552 na FY13E 339,090 10% 25% 84,772 40% FY14E 379,780 10% 30% 113,934 34%

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Commercial Vehicles Outlook growth moderation in progress

After two years of strong 30%+ growth, domestic medium and heavy commercial vehicle (M&HCV) sales are moderating (YTD: +9%) in FY12 in line with the slump in industrial production. However, we note that truck operator demand remains under pressure due to a) 5-7% price hikes undertaken by manufacturers in last one year b) 100-200bps increase in interest rates and c) stagnant freight rates. Going forward, we expect the moderation in growth rates to continue. Chart 1: M&HCV volumes v/s IIP (%YoY)
18 16 14 12 10 8 6 4 2 0 50 40 30 20 10 0 -10 -20 -30 -40

IIP (LHS)

Dom MHCV Sales (RHS)

Source : Bloomberg

Within trucks we note that the 25T+ segment has been the fastest growing one with

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Commercial Engineers & Body Builders Management Meet Notes

Institutional Research

YTD-sales up 37%, even as the intermediate segment (12-25T) has seen sales stagnating. As a result, heavy truck segment now accounts for 30% of domestic truck sales as compared to 12% in FY07. Over the longer term, this shift will be a structural positive as the road transport industry moves to a hub-and-spoke model. Heavy trucks are more profitable for manufacturers and more economic (larger payloads, better engines) for truck operators as well. Chart 2: Domestic M&HCV sales (6MMA %YoY)
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Chart 3: Truck sales segmentation (by tonnage)

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We estimate volume growth for the CV industry in FY13-14E at 10-12%, within which we estimate LCVs to grow at 14-16% and M&HCVs to grow at 8-10%. We believe that policy rate cuts by the RBI will stimulate investment and reverse the current downturn. However, we expect this to be visible likely in 2HFY13 after a lag following rate cuts in 1HFY13.

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Commercial Engineers & Body Builders Management Meet Notes

Cebbco a leading player in a niche industry
Incorporated in 1979, Commercial Engineers and Body Builders Company (Cebbco) is a leading manufacturer of bodies for trucks and railway wagons. Cebbco has five manufacturing facilities (three in Jabalpur and one each in Indore and Jamshedpur), mostly close to OEM factories. Cebbcos clients include Tata Motors, Ashok Leyland, AMW, Eicher and Vehicle Factory Jabalpur (part of Ministry of Defense). Cebbcos product portfolio spans bodies for tippers, tankers, trailers, load cargo bodies, garbage bin collectors, etc. In 2008, Cebbco diversified into railways and executed orders for Indian Railways in areas such as wagon refurbishment, manufacture of side and end walls for wagons and long hood structures for locomotives. Cebbco plans to ramp up this business significantly. While FY11 was a disappointment due to cutbacks from Indian Railway, management remains confident of growth prospects and has bid for new wagon tenders for approximately 15,000 wagons and is investing in building a new factory near Jabalpur to expand its infrastructure in this division. However, we note that wagon manufacture is also a competitive business with older, established players such as Texmaco Limited and Titagarh Wagons dominating the industry. Cebbco has also diversified into the power sector with manufacture of boilers and electrostatic precipitators (ESPs) and its clients include BHEL and L&T. We believe the diversification into Railways and Power should aid in reducing dependence on Tata Motors which is Cebbcos largest client. Tata Motors accounted for 74% of total revenues in FY08. Since then, Cebbcos diversification across railways and power as well as widening clientele in CV business, has resulted in share of Tata Motors coming down to 63% of Cebbcos revenues in FY11.

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Financials and Valuations

Financials Cebbco raised Rs1.5bn in Oct-2010 in an IPO where it offered 12m shares at Rs127/share. Post listing, however, the stock price fell sharply (from Rs93 to Rs43) in early December 2010 after the company released a statement that a) it had received lower than expected chassis orders from Tata Motors (due to Tata Motors issues with component suppliers) b) it was negotiating for price hikes from Tata Motors but had not yet received the same and c) the Railways had revised wagon refurbishment norms and that Cebbco was in the process of obtaining compliance. As a result the companys 1HFY11 profits stood at Rs26m and eventually Cebbco reported a sharp 72% fall in profits in FY11, despite a 17% growth in revenues. However since then, Cebbcos performance in 1HFY12 has improved sharply, with 1HFY12 revenues already at 92% of FY11 levels and 1HFY12 profits more than twice that of FY11 levels. This has been largely due to price hikes that the company received from Tata Motors in 1QFY12 and new orders from companies like L&T. Following these strong results and positive guidance issued by management, the stock price has risen 88% to current 52w high levels of Rs69 from levels of Rs40 in Oct-2011.

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Commercial Engineers & Body Builders Management Meet Notes

Table 3: Cebbco Financials
Year to 31st March (Rsm) Gross Sales Excise Revenues Raw mat % of sales Mfg exp % of sales Staff % of sales Oth exp % of sales Ebitda Margin (%) Depreciation Interest Other Income PBT Tax Tax Rate (%) PAT Source : Company, HDFC Sec Inst. Research FY10 2,410 (581) 1,829 (1,182) 64.6 (116) 6.3 (74) 4.0 (92) 5.0 365 20.0 (36) (68) 48 308 (105) 34.1 203 FY11 2,953 (832) 2,122 (1,642) 77.4 (121) 5.7 (105) 5.0 (123) 5.8 130 6.1 (39) (93) 74 73 (16) 21.6 57 1HFY12 2,824 (851) 1,973 (1,481) 75.1 (90) 4.6 (67) 3.4 (71) 3.6 263 13.3 (27) (36) 39 239 (75) 31.4 164

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Chart 4: Cebbco Share price movement

140 120 100 80 60 40 20 0
Nov-10 Nov-10 May-11 Nov-11 Feb-11 Mar-11 Jan-11 Jan-11 Jul-11 Dec-10 Sep-11 Aug-11 Aug-11 Dec-11 Jun-11 Apr-11 Jun-11 Apr-11 Jan-12 Oct-10 Oct-11 Oct-11

Company issues statement on drop in orders from Tata Motors, etc 1Q12 results announced

2Q12 results announced

Source : Bloomberg, HDFC Sec Inst. Research

Post IPO, Cebbcos balance sheet has also improved with debt/equity ratio at a comfortable 0.2x in 1HFY12. With margin expansion and jump in profitability we expect capital efficiencies will also improve. Capacity utilization in the core bodybuilding business stood at 70% in FY11 and should improve in the current fiscal further. Adding capacity in this business should not be significantly capital intensive given the low-tech, labor-intensive nature of fabrication. However, Cebbco is investing in building a new plant for its foray in Railways and return on investment on this project remains critical for longer term ROEs/ROCEs as this business is more competitive than the fabrication business.

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Commercial Engineers & Body Builders Management Meet Notes

Table 4: Balance sheet
Year to 31st March (Rsm) Net Block Investments Current Assets Inventories Sundry Debtors Cash Loans and Advances Total Current Liabilities & Provisions Current Liabilities Provisions Working Capital Total Assets Share Capital Reserves & Surplus Net Worth Debt Deferred Tax Total Liab Source : Company 534 582 34 351 1,502 693 632 61 809 1,265 429 283 712 548 6 1,265 692 306 260 437 1,695 624 618 7 1,071 2,646 549 1,624 2,173 461 12 2,646 672 768 216 531 2,187 936 802 134 1,251 2,878 549 1,788 2,337 494 47 2,878 FY10 450 6 FY11 1,191 384 1HFY12 1,589 38

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Valuations Following the recent sharp jump, Cebbcos stock price trades at 11.4x annualized 1HFY12 earnings. This appears attractive given the companys growth momentum and its competitive positioning of being the market leader in a niche industry. Appendix 2 gives a valuation matrix of listed automotive ancillary companies and as can be seen, large-cap stocks with robust capital efficiencies and market leadership in their product typically command a valuation premium. However, within mid/small cap stocks, we note the absence of a trend in terms of valuations versus capital efficiencies. Hence, while we believe Cebbcos stock valuations remain attractive given its long-standing relationship with Tata Motors and visibility of growth, we believe sustenance of this growth and increase in capital efficiencies would remain key triggers for to sustain and expand PE multiples. Key Risks Client Concentration: Share of Tata Motors to Cebbcos revenues remains high at 63%. While Cebbcos ongoing efforts to reduce this share is a positive, we note that Tata Motors is the largest player in CVs, with the next largest players Ashok Leyland and Eicher having a much lower share. Cebbco would require significant ramp-up from other its other CV clients to reduce dependency from Tata Motors in its core body-building related business

Vagaries of Railways orders: As was seen in FY11, while the potential from Indian Railways business remains high, translation of the same into orders and revenues can be a time consuming process. Besides, with presence of large players like Texmaco and Titagarh, Cebbco could face more competition in this business.

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Commercial Engineers & Body Builders Management Meet Notes

Institutional Research

Appendix 1 Quarterly and Annual Financials

Year to 31st March (Rsm) Gross Sales Excise Revenues Raw materials % of sales Mfg exp % of sales Staff costs % of sales Other expenditure % of sales Ebitda Margin (%) Depreciation Interest Other Income PBT Tax Tax Rate (%) PAT Source : Company 3QFY11 516 (115) 401 (282) 70.3 (29) 7.1 (28) 7.1 (28) 7.0 34 8.5 (10) (23) 18 20 (7) 37.7 12 18 4QFY11 906 (283) 623 (485) 77.9 (43) 6.9 (31) 4.9 (43) 6.9 21 3.4 (11) (22) 30 18 0 FY11 2,953 (832) 2,122 (1,642) 77.4 (121) 5.7 (105) 5.0 (123) 5.8 130 6.1 (39) (93) 74 73 (16) 21.6 57 1QFY12 1,148 (337) 811 (583) 71.8 (42) 5.2 (30) 3.7 (32) 3.9 125 15.4 (12) (18) 21 115 (46) 39.9 69 2QFY12 1,676 (514) 1,161 (898) 77.3 (48) 4.2 (37) 3.2 (40) 3.4 138 11.9 (15) (18) 19 124 (29) 23.5 95 1HFY12 2,824 (851) 1,973 (1,481) 75.1 (90) 4.6 (67) 3.4 (71) 3.6 263 13.3 (27) (36) 39 239 (75) 31.4 164

Appendix 2 Peer Comparison

NAME Bosch Exide Industries Cummins India Motherson Sumi Systems Amtek India Wabco India Amtek Auto Kirloskar Oil Engines Federal-Mogul Goetze India Sundram Fasteners Asahi India Glass Automotive Axles Sundaram Clayton Mahindra Forgings Banco Products (India) NRB Bearings Jamna Auto Industries Commercial Engineers & Body Lumax Industries Saint Gobain Sekurit India Steel Strips Wheels Gabriel India Wheels India Setco Automotive Shanthi Gears India Motor Parts & Accessor Munjal Showa Minda Industries Rane Holdings CMP (Rs) 7,060 119 359 137 97 1,293 105 124 203 49 62 403 157 52 65 41 96 69 388 36 204 42 300 163 34 645 67 166 178 MCap (Rsm) 221,676 100,980 99,487 53,200 26,778 24,526 24,437 18,080 11,324 10,223 9,868 6,090 5,945 4,834 4,627 4,003 3,960 3,791 3,627 3,271 3,024 3,006 2,961 2,881 2,754 2,683 2,670 2,634 2,547 FY11 Net Income (Rsm) 8,589 6,188 4,629 3,908 1,134 1,274 2,405 1,737 400 1,157 168 576 649 38 656 535 372 57 180 100 298 453 246 334 279 285 340 355 700 FY11 PE Ratio 25.8 16.3 21.5 13.6 23.2 19.2 7.2 10.4 28.6 8.8 58.9 10.6 9.2 122.5 7.1 7.5 9.9 58.5 20.2 32.7 9.6 6.6 12.0 8.6 9.9 9.4 7.8 6.3 3.6 Total FY11 P/BV Equity Ratio (Rsm) 40,980 5.4 23,958 14,852 18,363 18,941 3,867 48,571 8,894 4,262 5,553 2,157 2,439 9,120 7,912 3,524 2,069 1,344 2,173 1,545 657 2,829 1,865 2,175 923 2,292 1,345 2,030 1,987 5,158 4.2 6.7 3.3 1.4 6.3 0.5 2.0 2.9 1.9 4.6 2.5 1.0 0.6 1.3 1.9 2.9 1.7 2.3 5.0 1.1 1.6 1.4 3.1 1.2 2.0 1.3 1.4 0.7 FY11 RoE FY11 RoCE (%) (%) 23.0 28.8 34.0 28.2 6.4 38.8 6.1 10.6 22.5 8.1 25.7 11.7 0.5 19.8 28.0 35.6 4.0 12.1 16.5 12.6 27.0 11.8 42.0 12.7 22.9 17.7 27.6 19.3 21.4 27.1 31.9 18.3 5.2 38.4 5.1 11.6 11.5 5.5 21.3 8.5 3.0 16.2 19.9 25.1 6.2 9.9 15.2 8.4 18.2 11.3 21.1 12.0 22.8 12.4 14.9 14.6

Source : Bloomberg. Note above list is based on stocks with a market cap of Rs2.5bn+

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Commercial Engineers & Body Builders Management Meet Notes

Institutional Research

Appendix 3 Case Study: Automobile Corporation of Goa

Automobile Corporation of Goa (ACG) is a group company of Tata Motors (which holds 44% in ACG) and makes sheet metal components as well as bus bodies (7080% of ACGs revenues) for Tata Motors. Over the past six years, the share of ACGs bus bodies ranged between 6-15% of Tata Motors bus (ie goods carriers across MHCV and LCV) sales and averaged around 11% during the period. Table 5: Trends in share of ACG bus bodies
Year ended 31st March (nos) Bus Bodies sold by ACG Tata Motors Bus Sales Share of ACG (%) Source : SIAM, Company FY06 3,004 27,924 10.8 FY07 3,929 35,215 11.2 FY08 3,796 30,256 12.5 FY09 4,509 29,383 15.3 FY10 2,373 41,263 5.8 FY11 4,826 38,819 12.4

On an average, the per unit realization in the Bus Body and Components Segment for ACG, was Rs0.6m/unit, with the drop in FY09 largely on account of higher share of smaller buses as well as steep price reductions taken to push sales during the downturn. Table 6: Bus Body Segment Revenues
Year ended 31st March (Rsm) Revenues Numbers Rsm/unit Source : Company FY06 1,745 3,004 0.58 FY07 2,410 3,929 0.61 FY08 2,450 3,796 0.65 FY09 2,568 4,509 0.57 FY10 1,694 2,373 0.71 FY11 3,061 4,826 0.63

As per ACG segmental data, the Bus Body and Component division had margins of 10-11% on an average, but higher ROCEs. For the company as a whole, ACGs ROCE for FY11 stood at 28% and RONW at 20%. Table 7: Bus Body Segment Profitability
Year to March (Rsm) Segment Revenue Segment Results Capital employed Result/CE (%) Source : Company FY06 1,773 191 10.8 314 60.7 FY07 2,452 263 10.7 382 68.8 FY08 2,493 191 7.7 674 28.3 FY09 2,609 159 6.1 658 24.2 FY10 1,716 (86) (5.0) 735 (11.7) FY11 1HFY12 3,106 331 10.6 724 45.7 1,031 82 7.9 697 11.7

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Commercial Engineers & Body Builders Management Meet Notes

Institutional Research

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