>ZF STEERING GEARS (VENTURA)

ZF Steering Gears (India) Limited, a pioneer in manufacturing and supply of Steering Gears for commercial vehicle (CV) space in India, is expected to gain from the rising demand for the steering gears. Apart from the positive business outlook, ZF also has significant liquid investments in its balance sheet which at the current prices is valued of Rs 115 per share. This provides much needed cushion to the stock. Over the next two years ZF is expected to exhibit a CAGR of 29% & 40% in its revenues & profitability respectively. At CMP of Rs 450, the stock is available at 9.1x & 7.3x its estimated earnings of Rs 49.4 & Rs 61.3 respectively. We recommend a BUY at CMP for a price target of Rs 615 an upside of 37% for a time horizon of 12 to 15 months.

■ Favourable Industry Outlook The Indian CV industry, after facing a severe demand slowdown in the second half of 2008-09, has bounced back strongly, reporting a strong demand recovery across most segments. After posting a drop of 24% in the production of CV for the fiscal 2008-09, the CV industry achieved an impressive 36% growth in 2009-10. The trend has even continued in the first quarter of the current fiscal (Q1FY11) with growth coming in at a robust 36.4% growth. Although the medium to longer term outlook remains strong given the expectations of continued economic revival, the growth in volumes is likely to see some moderation & is expected to be at around 19-20% for FY11 & 7-8% for FY12.

■ Commands a significant market share ZF Steering commands a strong market share in the domestic CV space with nearly 45% market share. Its only competitor with similar market share is Rane TRW Steering Systems Limited. The balance 10% of the CV Steering Gears market is met by imports from China. Almost 65% of the Tata Motor’s requirement in the CV space is met by ZF whereas in case of Ashok Leyland, it meets nearly 35% of its requirements. Further 100% of the requirement for Eicher Motors & Man Force is met by ZF.

■ Investment Value per share provides cushion Besides its core business of manufacturing steering gears, ZF has significant portion of income coming from its investments in liquid funds. The cash value per share of these investments is valued at Rs 115 per share and provides significant cushion.

■ Better Capacity Utilization to enhance its operating margins Currently ZF has installed capacity of 270,000 power steering gears & 180,000 mechanical steering gears. The capacity utilization in FY10 stood at 51% & 69% for power & mechanical steering gears respectively. With the volume growth expected at 24% & 15% for FY11 & FY12 respectively capacity utilization would improve leading to higher operating margins at 22.8% in FY12 from 20.4% witnessed in FY10, an increase of 240 bps.

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