Company review: Omax Autos

Company review: Omax Autos

Omax Autos Ltd (OAL) is in the business of producing sheet and tube metal components for automotive original equipment manufacturers (OEMs). Its products include body frames, mufflers, sprockets, front fork assemblies, handles, leg guards, chain cases and main stands among others.

Two-wheeler segment contributes over 70% of OAL’s revenues with the bulk of business coming from Hero Honda Motors (Hero Honda). The company recently diversified its business operations to supply metal houseware products to international retail majors—IKEA and Wal-Mart.

After growing at a hefty rate of 31% in H1FY2009, OAL’s revenues hit a roadblock in H2FY2009 declining by 2.5% year on year (yoy). This (H2 performance) was a reflection of extreme business pressures on OEMs in the domestic market and drying-up of export orders, as overseas clients faced the heat of the global economic meltdown. Thus, for the year as a whole the company turnover saw an overall growth of 13.7%.

What lies ahead?

Business from anchor client Hero Honda Motors that brings ~65% of OAL’s revenues has been the industry leader in two-wheelers has remained stagnant and is likely to remain so. While other component suppliers to Hero Honda, such as Munjal Showa, Munjal Auto, Rico Auto etc. chose to set up plants at Haridwar to cater to Hero Honda Motors’ production requirements for its Haridwar plant (commissioned in April 2008) OAL shied away.

OAL has recently diversified into home furnishing business, and supplies metal components such as folding beds, bathroom fittings to international retail majors such as IKEA and Wal-Mart. Current revenues from this business stand at around Rs40 crore and are expected to expand to Rs96 crore by 2011.

Apart from home furnishings, the company is also diversifying into component manufacturing for commercial vehicles (CV) and has set up a dedicated facility in Lucknow through which it will supply components to Tata Motors (with expected revenues of Rs20 crore in FY2011).

The company is also exploring opportunities in supplying sheet metal and tubular components to the railways and defence and is in the process of setting up dedicated facilities for the same in Kapurthala at an estimated capex of around Rs40 crore. However, this segment is still in initial stages of set up and is expected to become operational only after FY2011.

Outlook and valuations

We expect OAL’s top line to show a compounded annual growth rate (CAGR) of 9% over FY2009-11E, however with a 106-basis-point improvement in operating margins, we expect the operating profit to grow at a CAGR of 16.4% in the same period.

With lower interest costs, the bottom line is expected to grow at a hefty CAGR of 46% over the period FY2009-11E over a small base.

However even with the hefty growth in net profit, the return ratios—return on equity (RoE) of 8.9% and return on capital employed (RoCE) of 12.9% FY2011E—would remain low. Further, the debt equity ratio shall continue to remain high at 1.6x. At the current market price of Rs47 the stock trades at 10.3x and 7.2x its FY2010 and FY2011E earnings.