Stock Focus: Commercial Engineers & Body Builders Company Ltd

Puff! That's a long name for a company to track and invest. So we will restrict ourselves to the acronym CEBBCO.

So here is a special situation unfolding in this company. Our investment theme is primarily based on this special situation. The 2012 Annual Report clearly depicts the special situation the company is into with details.

Let's get started by going through Abhishek's take on CEBBCO here. Thanks Abhishek for getting me initiated on this.

Government encouraging sale of fully built commercial vehicles

Body built for commercial vehicles from unorganized players are generally suited for over loading which eventually takes a toll on country’s infrastructure. To address this issue Government of India is encouraging sale of fully built commercial vehicles by charging 2% lesser excise duty on  fully built vehicles (FBVs) as compared to sale of just
chassis.

CEBBCO being the largest commercial vehicle body builder with approx 35% market share, will be the biggest beneficiary of the government scheme. The industry stats remains that penetration of  FBVs in the Medium and Heavy Commercial Vehicle (MHCV) segment is currently only 20%, and OEMs plan to take this to 100% by end of 2017.

 So while the growth prospect for the MHCV segment is not good, the same for growth looks superb for FBV players. Let us understand this with numbers.

 

Items	FY10	FY11	FY12	FY13E	FY14E	FY15E	FY16E	FY17E	CAGR     (fy12-17)
MHCV carriers (units)	198,400	252,000	274,680	260,946	273,993	301,393	331,532	364,685
yoy growth (%)		27.0%	9.0%	-5.0%	5.0%	10.0%	10.0%	10.0%	5.8%
FBV penetration (%)	10.3	10.5	20	30	40	50	60	70
Potential of FBV market	20,495	26,410	54,936	78,284	109,597	150,696	198,919	255,280
yoy growth (%)		28.9%	108.0%	42.5%	40.0%	37.5%	32.0%	28.3%	36.0%

Replacement market a big opportunity

The replacement market is 10x bigger opportunity for CEBBCO than the OEM market. Although the product life cycle (PLC) of the chasis is long (~15 years) that of the body of commercial vehicle is ~3-5 years. This ensures a replacement market growing in tandem with automobile sales growth. Currently CEBBCO is utilizing Tata Motor’s dealership for distribution in the replacement market and has started rolling out own network.

According to the company estimates, around 40 lakh vehicles would require replacements. In 1QFY13, it started its dispatch to this market, selling 615 units The EBITDA margin in this segment is also
substantially high at 30-35% as compared to the EBITDA margin of 17% in the OEM segment.

 

Railways: New entrant but robust growth ahead

India needs ~29,000 wagons every year (India Railway Vision 2020 document) for the next 10 years. CEBBCO the latest entrant in wagon manufacturing has extended its expertise to cater to the entire rolling stock programme of the Indian Railways including components and wagon refurbishments.

Deori railway plant has received RDSO approval which is now eligible to bid for new wagons for the Indian Railways. The company has already received order for 247 wagons worth Rs 48 Cr from Braithwaite, a subsidiary of the Indian railways. The company expects to receive 250-500 wagons on a trial order in the next railway tender. CEBBCO targets to produce 1200 wagons by FY14.

Refurbishment also increases the life of a wagon by 12 years, while reducing its weight by around one tonne
because of the use of stainless steel. Incidentally, the wagon opportunity in India is estimated at Rs 60bn.

 

Benefits from the TRIFAC scheme to add value

CEBBCO benefits from the Trade and Investment Facilitation Corporation Ltd.(TRIFAC scheme.) Under this scheme, the company can get a subsidy of 75% on the incremental sales tax payable during the year. The company expects to receive Rs 230 Cr (Rs 100 Cr under CV expansions and Rs 130 Cr for the railway project at Deori) in the next five to seven years. 

The sales tax subsidy will be adjusted in the subsequent year at the time of sales tax assessment. The company would receive the amount typically towards the end of every year.

Promoter Holding; Tata Group backing; Strong quarterly numbers

The promoters hold 56% and Tata Capital as anchor investors hold 11% with the balance 33% with other stakeholders.

The growth optimism is nicely getting reflected in the quarterly performances of the last two quarters of FY13 so far.

Quarter	Sep-11	Sep-12	YoY growth	H1 Sep-11	H1  Sep-12	YoY growth
Net Sales Turnover	117.21	153.78		199.45	322.78
Other Income	0.79	0.75		1.74	1.93
Total Income	118	154.53	31.0%	201.19	324.71	61.4%
Total Expenses	102.32	122.6	19.8%	170.97	259.17	51.6%
EBITDA	15.68	31.93	103.6%	30.22	65.54	116.9%
% Operating margin	13.3%	20.7%	55.5%	15.0%	20.2%	34.4%
Depreciation	1.47	4.19		2.72	8.25
EBIT	14.21	27.74		27.5	57.29
Interest	1.8	3.76		3.56	6.8
PBT	12.41	23.98		23.94	50.49
Tax	2.92	7.69		7.52	15.96
Net Profit	9.49	16.29	71.7%	16.42	34.53	110.3%
% Net margin	8.0%	10.5%	31.1%	8.2%	10.6%	30.3%
Basic EPS	1.73	2.96	71.1%	2.99	6.28	110.0%

All in all, looks well set to churn out robust numbers and strong profitability over the next 2-3 years.