>COMMERCIAL ENGINEERS & BODY BUILDERS CO LTD

Capex to drive growth…


Action
Increasing capacity by 50% in FBVs and executing orders from Indian railways for Wagon manufacturing & refurbishment, intensifies our belief in the outperformance of CEBBCO. We recommend “Accumulate” rating on CEBBCO with 1 year price objective of INR 115 (30.9% upside).


Triggers
News flow with regards to falling interest rates & removal of mining ban along with GoI‟s higher spending on infrastructure projects will spur growth of CV industry and will be the major catalysts for a higher earnings estimate.


INVESTMENT ARGUMENT 


Growing preference towards FBVs - Financing for truck bodies and quality assurance given by the major OEMs are main reason for shift towards buying FBV. Even changes made in recent budget will help to save 2% of excise duty on purchase of FBVs, eventually boosting its demand. Moreover increasing capacity by 50% in FBVs with expected 100% capacity utilization will boost CEBBCO‟s earnings. 


Wagon manufacturing, a new area of growth – Recent entry into railway segment in form of wagon refurbishment and manufacturing will boost the earnings as margin from this segment are higher (18-20%). Execution of Braithwaite‟s order of 248 wagons in 1HFY13 along with executing trial orders in H2 FY13 will garner close to INR 1 bn revenue in FY13. 


Tax incentives of INR 2.3 bn under TRIFAC scheme – State government of Madhya Pradesh operates TRIFAC scheme to facilitate industry, investment and employment generation within the state. Due to its expansion in Jabalpur, CEBBCO will get sales tax refund worth INR 2.3 bn spread over a maximum of 7 years under the scheme which will boost the bottom line by INR 300 mn in FY13.


VALUATION
We expect CEBBCO to post a Net Profit CAGR of 60.7% over the next couple of years. It currently trades at 5.6x and 4.6x to its FY13 and FY14 earnings respectively. We have valued the stock on a P/E multiple basis at 6x of FY14e EPS of INR 19.2 giving the price objective of INR 115 (30.9% Upside).


To read report in detail: CEBBCO
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