We are not recommending the stock that is mentioned in this article and investors should wait and watch for interesting cases like these and check how they progress in the near future.
PPAP is a leading manufacturer of Automotive Sealing Systems, Interior and Exterior Automotive parts in India. The company’s state of the art manufacturing facilities are located in Noida (UP), Greater Noida (UP), Chennai (Tamil Nadu) and Pathredi (Rajasthan). The registered office of the company is located at New Delhi.
The company was established in 1978 for the manufacture of custom made extrusion products. The company commenced the Automotive Parts Business in 1985 with the start of production of Maruti (Maruti Suzuki) cars in the Indian market. The company was consequently listed on the Indian Stock Exchange (BSE / NSE) in 2008.
The company’s core competence is in Polymer Extrusion based Automotive Sealing System and Injection Moulded products. In 2012, the company ventured into EPDM Rubber based Automotive Sealing System by establishing a Joint Venture with its Technology Partner Tokai Kogyo Co. Ltd. – Japan.
The Automotive Sealing system product range includes Outer Belt Moulding (Black type / Bright type), Inner Belt Moulding, Windshield Moulding, Roof Moulding, Quarter Window Moulding, Air spoiler, A-Pillar Garnish, B-Pillar Garnish, Body Side Protector, Skirt Air Damper and Slide Rail system. The Company also manufactures interior and exterior Injection moulded products like Door Trims, Interior Pillars, Rear Parcel Shelf, Trunk Linings, and Fender Inner.
PPAP is a key supplier to all the major automotive manufacturers in India. Some of the prestigious manufacturers like Maruti Suzuki India Limited, Honda Cars India Limited, General Motors India Private Limited, Toyota Kirloskar Motor Private Limited, Renault Nissan Automotive India Private Limited, Tata Motors Limited, Ford India Private Limited and Mahindra and Mahindra Limited along with the other OEMs. The Company also caters to CKD Parts export requirements of its customers. The Company also caters to the requirements of their respective Tier 1 suppliers. PPAP recently added SML Isuzu, which is a leading LCV manufacturer as a new customer and would be manufacturing instrument panels for them.
PPAP has a technology transfer agreement with Tokai Kogyo Co. Limited, Japan for development and manufacturing of Automotive Sealing Systems. The relationship between both the companies started in 1989 and since then both the companies enjoy a harmonious and mutually beneficial relationship with each other.
Around 95% of the total sales of the company are derived from the Indian passenger car industry. Rest are from sales to the light commercial vehicle segment and others. Maruti Suzuki Indian (MSIL) contributes 45% and Honda Cars India 39% of total sales. Tata Motors, M&M, Toyota Kirloskars, Nissan and General Motors constitute the rest. Requirements for the new model launches of these players will be supplied include Kwid, Baleno, Innova variant, Ignis, Vittara, Brezza, Baleno RS, S Cross and Honda City automatic variant Honda Jazz.
The stock at Rs.186 trades at a price to earnings multiple of 18 and at a price to sales of 0.82 with a market capitalization of Rs.2.609 billion in the current scenario. The stock has given a return of 26% in the last one year and has returned 18% year to date. The valuations are not cheap from the price to earnings multiple point of view but if the earnings grow faster then it would become cheap. The valuations are however cheap considering a price to sales ratio of 0.82 and a book value of Rs.157. The 52-week high reached was Rs.207.7 for this Company in the month of October 2016 on expectations of higher revenue and earnings growth.
It would Look Attractive for Investment If?
If the Company is able to diversify its customer base and reduce dependency on Maruti Suzuki and Honda Cars India, investors would rerate this stock to a higher level. Efforts are on to secure Hyundai Motors’ business. In fact, a breakthrough has been achieved by bagging small orders for supply to the Hyundai i10 model for exports and local market. Sales are expected to begin from the March 2017 quarter. Actively collaboration is on with M&M for supplying of sealing products and moulding requirements for its passenger car. There are hopes of some breakthrough. Similarly, talks are on with Suzuki to meet some of the requirements for its Gujarat plant. Orders might be finalized by the end of FY 2017. Over the past three years, more than Rs 700 million has been invested in increasing the capacities for future growth. The capacity utilization of all the four plants together is around 75%.
In the Automotive sealing business there are two segments which the Company caters to, with one being the plastic based sealing products and the other being rubber based sealing products. PPAP already has a market share of 90% in the plastic based sealing products and has recently entered into rubber based sealing products segment. If the Company is able to use their leadership position in the plastic based sealing products to garner higher and higher market share in the rubber based sealing products then it would give scope for the revenue and earnings to grow at a higher pace from the current scenario which would be positive from an investment point of view.
The debt-equity ratio was at 0.31 as on 30th September 2016 and is expected to reduce in the near future. Any reduction in the debt of the Company would eventually improve profitability which is good from an investment perspective.
As car sales are largely financed and paid for through the banking channels, demand for cars has been least affected due to demonetization, which is a big positive for suppliers like PPAP in the Auto Ancillary industry.
The market is not pricing the stock at expensive valuations as the growth has been lower than expectation with 10 year, 5 year and 3 year sales growth at 12%, 8% and 12% respectively. If any positives start to favour the Company in the near future the stock would get rerated to higher levels immediately. Investors would have to wait and watch how the company delivers on financial performance before taking any action.