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Your Questions February 2018

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By IE&M Research

I own a large quantity of Setco Automotive Ltd. Can you put some light on the last quarter results and future prospects of the company? What would be the main factor which can re-rate the company? – Puja Chandra, Kolkata 

Setco is a monopoly player in its segment with nearly 90% market share after swallowing clutch auto much earlier. It’s a terrific proxy to the growth of Tata Motors and Ashok Leylands of the world. The problem, however, lies in its inconsistency. The endeavor of the son in building stadiums also looked haywire. If it can sustain the numbers with that 200 bps improvement in EBITDA margins, the company could find itself in a much higher level. Compared to first quarter sales of Rs73 crore second quarter has witnessed robust growth in sales at Rs135 crore in all segments, along with reduction in costs resulting in significant improvements in operating margins. Overall improved cash flow, better working capital and reduction in interest rates have further contributed to improved performance. Against net loss of Rs11.89 crore in Q1FY18, the company has made a net profit of Rs13.76 crore in Q2FY18.

Highlights: Overall revenue has increased by 41% compared to Q2FY17 and 111% compared to Q1FY18. Post GST implementation from July17, business MHCV (across all segments has registered a significant increase. Production during the quarter registered an increase of around 60% compared to Q1FY18 and around 15% compared to Q2FY17. OEM sales during the quarter registered an increase of 90% over Q2FY17 on account of (i) buildup of ‘in transit’ inventory, making up for loss of sales in Q1, (ii) incremental sales of LCV, Tractor clutches and new products to Overall Aftermarket sales during the quarter registered an increase of 13% over Q2FY17, substantially making up for losses in Q1. Exports increased by 45% over Q2FY17 mainly due to supplies of clutches specially developed for the North American market as well as overall positive trends. Growth trend witnessed during Q2FY18 is expected to accelerate in the coming periods on account of increase in OEM demand and exports as also sales of new products.

Operating Performance: EBIDTA margins have increased by 1.3% to 13.9% during Q2FY18 compared to 12.6% during Q2FY17 on account of (a) Increase in operating volumes. (b) Implementing price increases with all customers. (c) Improvement in other income for the operating efficiency. (d) Control over fixed costs. Income for the quarter includes Rs453 lakhs as Finance Income on account of redemption of preference shares investments made by the company in earlier years.

Sales Outlook: To register a growth of 14% OEM sales to grow by 10%. Production likely to continue strong, positive trends witnessed in Q2. Company’s major OEM customers are optimistic about the near future. Sales will increase by a further 10 % due to new product sales to Ashok Leyland, LCV sales to Tata Motors and sale of clutches to farm equipment segment to leading OE manufacturers in the farm equipment segment. Opening of mining segment will further enhance OEM demand. OES/IAM sales to grow post GST implementation, aftermarket sales have reversed by 12%, trend witnessed in Q1FY18 with new vehicles produced during FY15 / FY16 due for 1st replacement. Introduction of GST is positive for the company since it will affect the volumes of the unorganized sector. Exports Sales to grow by 40%. Sale of a new range of clutches in North American market, which has already commenced. EBIDTA margins in H2FY18 by 200 BPS to come down by around 6% despite increase in turnover on account of improved cash flow and significant reduction in working capital deployment. Standalone cash flow and balance sheet will significantly improve with the redemption of entire preference shares of Rs 34.65 crore during the fiscal.

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