1

Clutch Auto Ltd

BUY Target Price: Rs.100.00

CMP: Rs.81.70 Market Cap.:Rs.1332.93 mn.

Date: January 18, 2010

Key Ratios:

Particulars FY09A FY10E FY11E

OPM (%) 13.47 16.50 16.00

NPM (%) 2.53 3.86 3.97

ROE (%) 4.13 7.03 7.67

ROCE (%) 7.60 9.26 9.29

P/BV(x) 0.22 1.09 1.00

P/E(x) 5.26 14.67 12.42

EV/EBDITA(x) 0.99 4.20 4.33

Debt-Equity(x) 1.04 1.07 1.08

Key Data:

Sector Auto Ancillaries

Face Value Rs.10.00

52 wk. High/Low 90.20/14.95

Volume (2 wk. Avg.) 331000

BSE Code 505052

SYNOPSIS

• We initiated the coverage of Clutch Auto Ltd and set a

target price of Rs.100.00.

• Clutch Auto Ltd (CAL) is the largest supplier of clutches

to the commercial vehicle and tractor segment in

India. It is also India’s largest exporter of clutches and

exports to 40 countries, 85% to Americas.

• Increase in market share of the leading Truck

manufacturer in USA, with whom the Company has

made long term supply contracts will enhance

Company's business opportunity.

• A number of global automotive players are setting

production capacities in India, which can benefit

component makers.

• The Company, by launch of identifiable genuine

products across full range, was able to weed out

spurious products which led to sharp rise in sales in

replacement market from current year, leading to

further rise in replacement market sales to over 55%

soon.

• The top line and bottom line of the company are

expected to growth a CAGR of 17.47% and 47.12%

over FY09 to FY11E.

Share Holding Pattern:

V.S.R. Sastry

Vice President

Equity Research Desk

91-22-25276077

vsrsastry@firstcallindiaequity.com

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

drsastry@firstcallindia.com

2

Table of Content

Content Page No.

1. Investment Highlights 03

2. Company Profile 06

3. Peer Group Comparison 10

4. Key Concerns 10

5. Financials 11

6. Charts & Graph 13

7. Outlook and Conclusion 15

8. Industry Overview 17

3

Investment Highlights

• Results Update (Q3 FY10)

For the quarter ended on December 31, 2009 (Standalone) the company has registered a 43.73 %

(YOY) growth in the net sales and stood at Rs.577.95 mn from Rs.402.11 mn of the corresponding

period of the previous year.The operating profit for the quarter stood at Rs.95.73 mn from

Rs.49.74 mn, for the same quarter of last year. Operating profit margin surged to 16.56% from

the corresponding previous quarter of 12.37%. PAT for the quarter ended December 2009

increased significantly by 52.26% to Rs. 23.28 millions from Rs. 15.29 millions. EPS for the quarter

stood at Rs.1.42 per equity share of Rs.10.00.

Quarterly Results –Standalone (Rs in mn)

As at Q3FY09 Q3FY10 %Change

Net Sales 402.11 577.95 43.73%

PAT 15.29 23.28 52.26%

Basic EPS(Rs) 0.93 1.42 52.69%

4

• Margins (%):

Operating Profit Margins (OPM %)

Net Profit Margins (NPM %)

5

• Clutch Auto to acquire land in Rajasthan for Rs 150 mn

The company board has approved the proposal to acquiring 50,000 sq mtrs land (industrial plot

at Kahrani (Bhiwadi extn.) district Alwar, Rajasthan at a to cost of Rs 150 million.The

management has taken this decision with a broader objective to shift the factory from its

present site at Faridabad to Kahrani (Bhiwandi Extn.), Rajasthan at a much bigger space (almost

double size) at low cost for its expansion.

The site at Kahrani is close to the industrial corridor - Manesar industrial area, which has easy

proximity and locational advantages.

• Ventured into the US truck market

The company has ventured into the US truck market through the aftermarket route making it

the only offshore company to be able to do so. It plans to be a niche player in the low volume,

high value added heavy-duty clutch segment for class 7 and 8 trucks. This is because, the

replacement demand for trucks in US, with a population of nearly 4.5-5mn units, is nearly as

high (250,000 units pa) asthe demand for new trucks.

• CAL invested in technology& research

CAL invested in technology, research and filed for patents and trademarks for a number of

products that it developed. Today, the company is the only independent component company

from India with an independent patents and trademarks portfolio. It has built many innovative

products like the ‘Cool Clutch’,’ Whisper’ and ‘EZ N Lite’ offering interchangeability unit-to-unit,

component-to component with the same serviceability norms and tools.

6

Company Profile

Clutch Auto was founded way back in 1971 and now it is India’s largest clutch manufacturer &

exporter. Clutch Auto Ltd (CAL) is the largest supplier of clutches to the commercial vehicle and

tractor segment in India. It also caters to the passenger vehicle and replacement demand.The

company is India’s largest clutch manufacturer & exporter has held 3 Decades of undisputed

Leadership.The company is also India’s largest exporter of clutches and exports to 40 countries,

85% to Americas.The company is having largest aftermarket distribution network in India and

has state-of-the-art testing facility for Clutches. The company is having Govt. of India recognized

Research &development facility.

It also caters to the passenger vehicle and replacement demand and its clientele includes Tata

Motors, Ashok Leyland, Maruti Udyog, TAFE, Toyota, BEML, Escort Tractors and State Transport

Undertakings, among others. Clutch is a technology intensive business dominated by 6 players in

the world, all operating either as joint ventures or as technology partners or license

arrangements. CAL is the only standalone clutch company in the world, which is testimony to its

technology capability.

The company has developed, upgraded and upsized Ceramic and Cushioned Organic Clutches

with Retrofittability on old models of the popular trucks and buses, carving a new market

segment with a long term aftermarket potential besides fitment on current ongoing production.

Peculiarities of Indian operating conditions both in case of passenger carriers and commercial

vehicles and driving habits have been taken into consideration and performance demonstrated

after simulation and evaluation of modified Designs based on the valuable field data. The ‘Cool

Clutch’ developed for the US market along with Wear Indication capability – the ‘Whisper’ series

and ‘Ez N Lite’ – Twin Ceramic Self-Aligning clutch for heavy applications have been offered to

the Indian customers.

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Business Areas:

Clutch Auto is catering to three sectors viz. OEM, Replacement Market and Exports. Even under

depressed business environment, the Company was able to optimally use its product mix. The

Company was able to make good the shortfall in OEM sales by introducing 77 new products by

fiscal year end in the Aftermarket and Exports segment. Clutch Auto has made long term

commitments to OEMs' in Commercial Vehicle & Tractor segments including a Co-Manufacturing

Agreement with a MNC Clutch Manufacturer.

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Products:

• Clutch Cover Assemblies

• Clutch Plates/Discs

• Others

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Major customers:

1. Bajaj Auto

2. Mahindra Group

3. Maruti,

4. Tata Motors

5. BEML

6. Eicher

7. Indian Army etc.

Besides, commanding dominant position in domestic market, CAL supplies to 40 countries across

the globe. Latin America and North America forms the major (about 80%) overseas market for

Clutch Auto.

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Peer Group Comparison

Name of the company CMP(R.s)

(As on Jan

18.2010)

Market

Cap.

(Rs. Mn.)

EPS

(Rs.)

P/E (x) P/BV

(x)

Dividend

(%)

Clutch Auto 81.70 1332.93 4.49 18.20 1.11 0.00

Motherson Sumi Sys 152.00 54044.20 2.48 61.29 13.06 135.00

Amtek Auto 182.50 25731.20 9.62 18.97 1.01 25.00

Bosch 4951.00 155456.00 164.82 30.04 5.02 250.00

Key Concerns

• Infringements by local players in unorganized sector.

• General market environment.

• Penetration of Spurious products in Aftermarket segment.

• New Technologies.

• Consolidation by the Competitors in domestic arena.

• OEM's target to have total control on the Aftermarket can significantly impact company's

Replacement Market operations.

• Competition from Chinese low cost manufacturers can be a threat to Company's business in

some segments

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Financials

Results updates

12 months ended Profit&loss Account (Standalone)

Value(Rs. in million) FY08A FY09A FY10E FY11E

Description 12m 12m 12m 12m

Net Sales 2168.76 1961.20 2353.44 2706.46

Other Income 0.80 - - -

Total Income 2169.56 1961.20 2353.44 2706.46

Expenditure -1828.67 -1697.01 -1965.12 -2273.42

Operating Profit 340.89 264.19 388.32 433.03

Interest -113.39 -133.06 -146.23 -151.45

Gross Profit 227.50 131.13 242.09 281.58

Depreciation -58.90 -77.74 -141.15 -162.32

Profit before Tax 168.61 53.39 100.94 119.26

Tax -14.07 -3.80 -10.09 -11.93

Profit after Tax 154.54 49.59 90.84 107.33

Net Profit 154.54 49.59 90.84 107.33

Equity Capital 163.15 163.15 163.15 163.15

Reserves 1007.64 1037.37 1128.21 1235.55

Face Value 10.00 10.00 10.00 10.00

Total No. of Shares 16.32 16.32 16.32 16.32

EPS(Rs) 9.47 3.04 5.57 6.58

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs. in million) 30-Jun-09 30-Sep-09 31-Dec-09 31-Mar-10E

Description 3m 3m 3m 3 m

Net Sales 530.97 551.14 577.95 612.63

Other Income - - - -

Total Income 530.97 551.14 577.95 612.63

Expenditure -448.79 -460.95 -482.22 -511.54

Operating Profit 82.18 90.19 95.73 101.08

Interest -32.33 -31.82 -39.10 -41.23

Gross Profit 49.85 58.37 56.63 59.85

Depreciation -27.00 -39.70 -33.35 -35.16

Profit before Tax 22.85 18.67 23.28 24.69

Tax -2.70 -0.80 - -2.47

Profit after Tax 20.15 17.87 23.28 22.22

Net Profit 20.15 17.87 23.28 22.22

Equity Capital 163.15 163.15 163.15 163.15

Face Value 10.00 10.00 10.00 10.00

Total No. of Shares 16.32 16.32 16.32 16.32

EPS(Rs) 1.24 1.10 1.43 1.36

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Charts

A) Net sales & PAT Chart

B) EV/EBITDA(x) chart

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C) P/E(X) Chart

D) P/BV(X) chart

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1 Year Comparative Graph

Outlook and Conclusion

• At the current market price of the stock Rs81.70.00, the stock trades at a P/E of 14.67 x and

12.42 x for FY10E and FY11E respectively.

• The EPS of the stock is expected to be at Rs.5.57 and Rs.6.68 for the earnings of FY10E and

FY11E respectively.

• The top line and bottom line of the company are expected to growth a CAGR of 17.47% and

47.12% over FY09 to FY11E.

• On the basis of EV/EBDITA, the stock trades at 4.20 x and 4.33 x for FY10E and FY11E

respectively.

• Price to Book Value of the stock is expected to be at 1.03 x for FY10E and 0.95 for FY11E.

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• The Indian automobile industry is on fast revival after tough period in later half of FY09.

With confidence returning in economy, CV and Capital goods sales are witnessing upward

trend after almost 2 years of slow down.

• Indian ancillary industry itself has emerged as hub for global markets. There is fast

expansion in Service network by all auto makers and vehicle owners are becoming more

sensitive to quality of service, which can benefit branded components makers like CAL.

• Company, by launch of identifiable genuine products across full range, was able to weed out

spurious products which led to sharp rise in sales in replacement market from current year,

leading to further rise in replacement market sales to over 50% soon.

• A number of global automotive players are setting production capacities in India, which can

benefit component makers.

• The replacement market is the most important segment, accounting for 47% of the sales.

CAL has vast marketing pan India network of 37 marketing offices in 20 major cities.

• Latest trend indicates that – in second half, the sales to OEMs as well as to replacement

market is growing at a very fast pace. This will result in to much higher capacity utilizations

and with faster growth in replacement market, plus margins will grow still better.

• Growth in Auto Industry directly benefits the Ancillary industry.

• We recommend ‘BUY’ in this particular scrip with a target price of Rs.100.00 for Medium to

Long term investment.

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Industry Overview

Automotive Industry, a prominent segment of the national economy was adversely affected due to

Global slowdown, however, continued to survive due to Govt, of India's committed expenditure on

the infrastructure sector of the economy. This is the first year of set back ever since the Automotive

Mission Plan 2016 was announced by the Government of India with growth rate estimated at 6%,

after achieving double digit growth in recent years. The year witnessed steady falling demand for

medium and heavy commercial vehicles (MHCV), which was primarily due to overall slowdown in

industrial production. The severe demand shortage since October, 2008 led the leading commercial

vehicle manufacturers to cut down schedules drastically, followed by repeated lay-offs, resorting to

repeated book closures, job-cuts etc. This was coupled with huge credit crunch and the working

capital of large OEMs virtually exhausted, impacting on liquidity of the Tier I suppliers. Hardening of

interest rates coupled with higher inflationary pressures and industrial slowdown affected the

input costs and availability of essential raw materials very adversely resulting in both bottom and

top lines in the Automotive Industry. In-spite of RBI and other Financial Institution's continued

initiatives to enhance liquidity in the system, Bankers were shy to increase their exposure in the

Automotive Sector, and as such could not virtually make any impact on the liquidity. The situation

was further fuelled by the Transporters strike in early January, 2009 for a shorter haul. Transporters

have deferred purchases despite stable freight rates with rising cost of ownership impacting their

profitability amidst concerns over freight demand sustainability.

In International arena, US Heavy-Duty truck sales hit their lowest level in 16 years during 2008,

falling for the second straight year, even though they made a modest recovery after hitting bottom

in May, 2008. Further, several North American truck and engine makers underwent significant

change during 2008 as they prepare for the next round of federal emission regulations slated for

2010. The fall out of the US Big Three viz. GM, Ford & Chrysler made significant impact on the

component manufacturers in India.

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As per SIAM Report, overall Industry performance in 200809 was as under –

In domestic market, Passenger vehicle segment registered growth of 0.13% during 2008-09, the

sale of overall commercial vehicles declined by (-) 21.69%. Medium and Heavy Commercial vehicles

declined by (-) 33.16% and Light Commercial vehicles recorded de-growth at (-) 7.10%.

In Exports market, 2008-09 saw automobile exports growth of 23.61% with all segments except

Commercial vehicles, which was declined at (-) 27.67% during the year.

The Indian auto ancillary industry has come a long way since it had its small beginnings in the

1940s. If the evolution of the industry is traced in India, it can be classified into three distinct

phases namely: Period prior to the entry of Maruti Udhyog Ltd, Period after the entry of Maruti

Udhyog Ltd and Period post Liberalization. The period prior to the entry of Maruti Udhyog Ltd was

characterized by small number of auto majors like Hindustan Motors, Premier Automobiles, Telco,

Bajaj, Mahindra and Mahindra, low technology and assured business for most of the auto-

component manufacturers.

The entry of Maruti in the 1980s marked the beginning of the second phase of the industry. The

auto ancillary industry in the country really showed a spurt in growth during this period. This period

witnessed the emergence of a new generation of auto ancillary manufacturers who were required

to meet the stringent quality standards of Maruti’s Korean collaborator Suzuki of Japan. The good

performance of Maruti resulted in an upswing for the domestic auto ancillary industry. It was

during this period that auto components from India began to be exported.

The entry of foreign automobile manufacturers ranging from Mercedes Benz, Ford, and General

Motors to Daewoo following the government liberalizing the foreign investment limits saw the

beginning of the third phase of the evolution of the industry. The auto ancillary industry witnessed

huge capacity expansions and modernization initiatives in the post liberalization period.

Technological collaborations and equity partnerships with world leaders in auto components

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became a common affair. However, the tough competitive scenario saw a lot of consolidation in

the industry and it still continues unabated.

In 2008-09, automobile sales are expected to grow by around 12 per cent in value-terms, driven

mainly by favourable demographic trends, anticipated growth recovery in commercial vehicles and

robust export growth. Consistent growth and dedication have made the Indian automobile industry

the second- largest tractor and two-wheeler manufacturer in the world. It is also the fifth-largest

commercial vehicle manufacturer in the world. It is also the fifth-largest commercial vehicle

manufacturer in the world. The Indian automobile market is among the largest in Asia.

The key players like Hindustan Motors, Maruti Udyog, Fiat India Private Ltd, Tata Motors, Bajaj

Motors, Hero Motors, Ashok Leyland, and Mahindra & Mahindra have been dominating the vehicle

industry. A few of the foreign players like Toyota Kirloskar Motor Ltd., Skoda India Private Ltd.,

Honda Siel Cars India Ltd. have also entered the market and have catered to the customers’ needs

to a large extent.

Not only the Indian companies but also the international car manufacturing companies are focusing

on compact cars to be delivered in the Indian market at a much smaller price. Moreover, the

automobile companies are coming up with financial schemes such as easy EMI repayment systems

to boost sales. There have been exhibitions like Auto-expo at Pragati Maidan, New Delhi to share

the technological advancements. Besides, there are many new projects coming up in the

automobile industry leading to the growth of the sector.

The Government of India has liberalized the foreign exchange and equity regulations and has also

reduced the tariff on imports, contributing significantly to the growth of the sector. Having firmly

established its presence in the domestic markets, the Indian automobile sector is now penetrating

the international arena. Vehicle exports from India are at their highest levels. The leaders of the

Indian automobile sector, such as Tate Motors, Maruti and Mahindra and Mahindra are leading the

exports to Europe, Middle East and African and Asian markets. The Ministry of Heavy Industries has

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released the Automotive Plan 2006-2016, with the motive of making India the most popular

manufacturing hub for automobiles and its components in Asia. The plan focuses on the removal of

all the bottlenecks that are inhibiting its growth in the domestic as well as international arena.

The Future Growth Drivers:

• India's huge geographic spread- Mass Transport System.

• Increasing Road Development.

• Increasing disposable Income with the service sector.

• Replacement of aging four wheelers.

• Graduating from two wheelers to four wheelers.

• Increasing dispensable income of rural agri sector.

• Growing Concept of Second Vehicle in Urban Areas.

___________________________________________________________________________

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation for the purchase

or sale of any financial instrument or as an official confirmation of any transaction. The information

contained herein is from publicly available data or other sources believed to be reliable but we do not

represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors

Pvt. Ltd. or any of it’s affiliates shall not be in any way responsible for any loss or damage that may arise to

any person from any inadvertent error in the information contained in this report. This document is provide

for assistance only and is not intended to be and must not alone be taken as the basis for an investment

decision.

21

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