RICO Auto Industries (Rico), one of the leading manufacturers of high precession aluminum and ferrous components and assemblies, supplies the same to automotive original equipment manufacturers (OEM).
We had initiated coverage on the company with a Neutral view in November 2006 at Rs62. Thereafter, the stock had declined by more than 75% and is currently trading at around Rs16 per share.
This substantial underperformance by the stock was anticipated that was consistently affected by the challenging environment faced by its key OEM clients.
Rico was in capacity addition phase during FY2005-08, when it incurred capex of around Rs360 crore and also incurred Rs20 crore towards setting up the various JVs. During this capex phase, Rico was hit by lower-than-optimal capacity utilisation on enhanced capacity.
Margins were impacted by high depreciation charges and low operating leverage. Going forward, we expect exports and revenue through JV’s to be one of the major revenue drivers for the company.
However, we foresee FY09 to be a difficult year, although downside risks are limited from the current levels.
At Rs16, Rico is reasonably valued and is trading at 7.9x FY09E and 5.3x FY10E earnings. We upgrade the stock from Neutral to ACCUMULATE with a target price of Rs18 at a target multiple of 2.5x FY10E EV/EBITDA and 6x FY10E consolidated earnings.