The stock of an auto ancillary company appears to be an attractive bet for the long term. Jamna Auto, which claims to be the largest manufacturer of tapered leaf and parabolic springs for commercial vehicles (CVs) in India, can ride the wave of ongoing positivity in the CV cycle.
Brokerage firm LKP Securities has initiated coverage on the stock with a 'buy' recommendation and pegged the target price at ₹140, expecting an upside of 26 percent in the next one year.
The smallcap stock has been on a volatile track this year. The market capitalisation of Jamna Auto is ₹4,402.79 crore on December 13. Those stocks whose market capitalisation is less than ₹5,000 crore is considered to be a smallcap stock.
As of December 13, the stock has gained 7.57 percent this year against a 7.35 percent gain in the benchmark Sensex.
The stock hit its 52-week high of ₹135.55 on July 4, 2022; at present, it is down 18.52 percent from its 52-week high level.
LKP Securities expects CV demand to improve on a favourable base, momentum in economic activities and government infra initiatives.
But the CV recovery is not the only positive factor for the stock.
LKP thinks Jamna’s new product additions in the suspension segment, improvement in the parabolic springs mix and focus on the after-market segment should aid in reporting a strong topline CAGR of 27 percent over FY22-25E.
LKP further said that the company's management’s cost reduction measures taken in the last 24 months and utilization improvement benefit will aid in strong bottom line growth for the company with 34 percent CAGR over the same period.
In order to mitigate the risks (CV downcycle + Covid-19 impact), the management of Jamna had taken the decision to bring down the costs and also focus on improving the contribution margins to bring down the break-even capacity.
The company has achieved the earlier set target and LKP believes it is on track to achieve the new target across various business parameters.
As the brokerage firm highlighted, the target set by the management in the FY21 Annual Report (AR) is to achieve 50 percent of revenue from the new products like Parabolic springs and other suspension products by FY27 is on track and it has improved from 34 percent in FY21 to 37 percent in FY22.
LKP underscored that during the year FY22, the net debt of the company rose from ₹73.5 crore in FY21 to ₹150 crore on account of higher working capital requirements. Despite this, the company reported strong double-digit return ratios.
"Jamna reported 20.6 percent RoE (return on equity) and 26.2 percent RoCE (return on capital employed) in FY22 supported by better operational efficiency (EBITDA margins reported at 13.2 percent versus 12.4 percent in FY21). Going forward, we expect a superior margin profile to take care of the debt in case it rises for any capacity expansion," said LKP.
"At the current market price, the stock is trading at 14.2 times FY25E EPS (earnings per share) of ₹7.7. Considering sustained strong EBITDA margins performance, an increase in value content per vehicle supported by new
product launches in the suspension segment, lean fixed cost structure, anticipated higher share of after-market (which is non-cyclical), and a strong balance sheet, we recommend a 'buy' on the stock with a target price of ₹140," said LKP Securities.
The stock looks good on fundamental parameters and can be a decent long-term bet. However, short-term traders can wait for some more time before they decide to buy it.
Jigar S. Patel, Senior Manager - Equity Research, Anand Rathi Share and Stock Brokers pointed out that on the technical front, the stock on July 4, 2022, registered a high of ₹133.40 and from there, it started making lower highs and lower lows structure which resulted in a 23 percent cut in the stock price.
"For the last one and a half months, it has not made further lower lows and has sustained the level of ₹104. One should wait as of now because immediate resistance is seen between ₹114-115 which needs to be broken on a daily closing basis. Fresh buying will only get triggered above ₹115 on a daily close basis," said Patel.
According to a MintGenie poll, an average of 7 analysts have a ‘hold’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.
