Shares of auto ancillary firms are experiencing a strong bull run for the past six months, which is mostly being backed by declining raw material costs and robust order wins from OEMs. Brokerages are also continuing to have a favourable outlook on the sector.
Maintaining their upward trajectory, shares of Rico Auto Industries, an auto ancillary firm, scaled to a new 52-week high of ₹94 apiece during Friday's trade. The stock picked up steam after it dropped to a 52-week low of ₹31.3 in March of last year, and it has since maintained the strong upside move by increasing 200.31 percent to this point.
The stock ended in the green for the past seven months in a row and is up 9.79 percent in January so far. The stock is 18.59 percent away from its all-time high of ₹110.90 which was set in October 2017.
The stock also piqued the interest of FIIs, as they raised their stake to 1.4 percent in the December quarter from 0.5 percent in the same quarter of the last fiscal year.
Rico Auto Industries is an auto ancillary company that specialises in aluminium and ferrous casting auto components. It is an engineering-led organisation with 15 manufacturing plants and counts all major domestic, and global OEMs as its clients.
The company also manufactures EV components like an electric motor housing and proprietary design parts like engine oil pumps, and engine water pumps.
Brokerage firm ICICI Direct Research stated that it had interacted with the company's management and was impressed by the new order wins from marquee OEM names including BMW and Toyota, largely driven by its strong engineering capabilities.
The company is a single-source supplier for a set of components in the Toyota Hybrid, which has been outsourced for the first time by Toyota. Also, the company is a single-source supplier of oil pumps at Maruti Suzuki, according to the brokerage.
Rico started as a 100 percent ancillary to Hero MotoCorp and gradually expanded into the PV space with Maruti. It is now serving more than 30 domestic and global customers across all categories. Hero MotoCorp, however, is its largest client. Also, Rico has developed paper-based friction materials for 2-W clutch applications, ICICI Direct said.
The majority of the machines at Rico are fungible and can be used for making a variety of components, resulting in a limited capex requirement. The company also manufactures its own machines. Also, before incurring any capex, it secures sufficient order to cover that capex for a particular project, the brokerage highlighted.
The brokerage outlined some of the key upside triggers for the stock, including healthy double-digit return ratios, a decline in debt levels in FY24E, an increasing trend of light weighting to boost the aluminium casting business, and consistent cash flow from operations at ₹100 crore.
On the fundamental side, the net profit of the company has been growing consistently for the five quarters. During the September quarter, the company posted a 30 percent jump in its consolidated net profit to ₹8.7 crore as against ₹6.7 crore in the corresponding quarter of the preceding fiscal.
The company's revenue from operations during the quarter increased by 23.87 percent to 598.2 crore, up from ₹482.9 crore in the previous fiscal's corresponding quarter.
The earnings per share (EPS) of the company improved to ₹2.6 in Q2FY23 from ₹1.5 in Q2 FY22. The company reported an EPS of ₹2.5 in the preceding quarter.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.