Gabriel India soars over 60% since March lows; ICICI Direct expects another 25% upside

After experiencing a continuous downfall between December 2022 and March 2023, losing nearly 30% of their value, Shares of Gabriel India made a strong recovery in the following two months to May, completely covering their four-month loss.

This upward trend continued into June, with the stock delivering a return of 10%, and in the current month so far, it has rallied 9.6% to ₹208.50 apiece. Overall, from its March 2023 low of ₹129.45, the stock has yielded an impressive return of 61% to date.

Moving ahead, brokerage firm ICICI Direct Research pointed out that the stock still has plenty of room to grow. The brokerage's optimism stems from the company's increasing prominence in the PV-SUV space, healthy financials, and inexpensive valuations.

Gabriel India, part of the ANAND Group, is a small-cap auto ancillary stock with a market capitalization of ₹3,046 crore. It is a leading manufacturer of Ride control products such as shock absorbers, struts, and suspension systems for 2-W/3-W heavy and Passenger vehicle segments.

It has seven strategically placed manufacturing plants in India (providing just-in-time supply support to marquee customers) and exports to over 20 countries. Its capabilities include design, development, testing, and validation. It has a sizeable presence across all vehicle categories and is largely an OEM-centric auto ancillary player (80%+ share in sales).

Riding the growth trajectory

Gabriel India is set to ride the wave of the underpenetrated PV space in India, as the sector shows promising potential for long-term growth.

The number of cars per 1,000 people in India stands at less than 30 units, significantly lower than China's over 100 units and the developed nations of Europe's over 500 units. This implies ample room for growth as India develops infrastructure, generates jobs, expands into export markets, and improves its standard of living.

Gabriel India (GIL) is conscious of this fact and is gaining traction in the PV space domestically, said ICICI Direct Research.

Gaining market share

The brokerage notes that the company is gaining traction in the PV space domestically, with the company's revenue share from the PV space increasing from 21% in FY21 to 23% in FY23. The trend is expected to continue, reaching 25%, with the company's intention to further improve it to 30%, it said.

Interestingly, within the PV space, the company realizes 64% of sales from the SUV space, which is witnessing healthy demand traction, with its domestic market share in the SUV domain pegged at 35%.

SUV sales as a percentage of total car sales in India have improved from 28% in FY19 to 52% in FY23 and are further expected to inch up amidst greater consumer demand for this space. GIL’s prominent presence in the SUV space bodes well for capturing the premiumisation trend prevalent in the domestic PV space, as highlighted by the brokerage.

Foray into premium segment

To expand its presence in the hot-selling SUV space and catch up on the premiumization trend, the company has entered into a JV with Inalfa (globally the 2nd largest sunroof manufacturer with OEMs like JLR, BMW, and Mercedes as clients) for the manufacturing of sunroof system and related components for OEMs in India.

Gabriel will hold a 49% stake in the JV. It has already won orders from Hyundai and Kia for its entire range of products. The company intends to spend ₹150 crore on setting up a plant with an initial capacity of 2 lakh units, which will be expanded to 4 lakh units in 3–4 years, with a peak annual revenue potential of ₹1,000 crore, according to brokerage.

Trades at inexpensive valuations

Capital efficiency and a healthy balance sheet have been the key USPs at Gabriel, thereby providing a good margin of safety. GIL’s balance sheet has a net cash surplus of ₹300 crore as of FY23 and on a consistent basis (ex-Covid period), is clocking healthy double-digit (15%) return ratios.

Even on the cash flow front, the company has been generating healthy CFOs. Going forward, the brokerage expects sales/PAT at GIL to grow at a CAGR of 10%/19% over FY23–25E, with RoCE seen at 20% by FY25E. At the CMP, the brokerage said the stock trades at an inexpensive valuation of 15x PE on FY25.

Maintains a 'buy' rating

In light of all growth factors, ICICI Direct Research maintained its 'buy' call on the stock with a target price of ₹260 apiece, valuing the stock at 20x P/E on FY25E EPS. This target price signals a 25% upside potential from the stock's previous closing price.

03 analysts polled by MintGenie on average have a 'strong buy' call on the stock.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.