Friday, December 30, 2011

>Commercial Engineers & Body Builders Company (CEBBCO): Largest player in outsourced body building fabrication of commercial vehicles (CVs) in India

■ Beneficiary of increasing demand for FBVs: Commercial Engineers & Body Builders Company (CEBBCO) is the largest player in outsourced body building fabrication of commercial vehicles (CVs) in India. The company stands to gain as fleet operators are increasingly in favour buying fully-built vehicles (FBVs), as against the earlier practice of buying a chassis and getting the body built by vendors in the unorganised market. The share of FBVs in total CVs has risen from 12% in FY10 to ~25% in the current fiscal. Our interaction with players in the industry leads us to believe that this would rise further, as in addition to better product quality, fleet operators can obtain complete financing for vehicles through the FBV route.

Organised body-building to spur growth

■ Railway segment to drive incremental growth: CEBBCO recently forayed into wagon manufacturing after a successful entry into the wagon refurbishing market, where it has garnered a market share of 20% over a two-year period. We expect the railways segment to contribute 20% of total revenues by FY14, up from 11% in FY12, post commencement of wagon production at its new plant in Deori, Jabalpur in Mar12. Moreover, given the higher margins in the segment, we expect blended EBITDA margins to improve by 40bps in FY13 and 30bps in FY14 to 13.7% and 14% respectively.

■ Outlook and valuation: CEBBCO’s operating performance post its IPO in late 2010 was adversely impacted as its largest client, Tata Motors’ (TTMT) realigned production to meet new, changed emission norms. However, we consider this an aberration; its fundamentals remain strong, as seen by its 1HFY12 results, wherein it posted a PAT of Rs164mn, against a PAT of Rs57mn for FY11. Going forward, we expect CEBBCO to grow revenues at CAGR of 32.2% over FY12-14, backed by the increased demand for FBVs (spurred by strong demand in the tipper segment) and higher revenues from railways segment. This robust growth in revenues, combined with better EBITDA margins should result in earnings CAGR of 31% over FY12-14. We value the company at a P/E of 10x FY13 EPS of Rs7, given the cyclical nature of the industry and lower entry barriers in the body fabrication business. We initiate coverage on CEBBCO with a Buy rating and a target price of Rs70.

To read the full report: CEBBCO