Shining Star: Shriram Pistons and Rings Ltd. – BUY

Shining Star: Shriram Pistons and Rings Ltd. – BUY

Recommended PriceRs. 1,960
Target PriceRs. 2,392
Upside %22%
Investment Horizon1 year

Founded in 1972, Shriram Pistons and Rings Ltd. (SPRL) is a big name in making pistons, piston rings, and other important parts for vehicles. They’re not just selling in India but also in over 45 countries worldwide, with a strong network of 1,200 spots in India alone for sales after the vehicle’s initial purchase. They make their products in plants located in Ghaziabad, Pathredi, and have a place in Coimbatore for making electric motor parts, and another in Neemrana for special components. They’re even setting up a new spot in Pithampur. With over 50 years in the business, SPRL has become a go-to for about 40-45% of the market in their main products, showing they’re a big deal in their field. They’ve managed to keep their business steady by selling to different kinds of customers and markets, which helps them not to rely too much on any single type of demand.

Why do we need to invest in SRPL?

Core product portfolio and R&D prowess to drive performance

Shriram Pistons and Rings Ltd. (SPRL) has been a big deal in making car parts like pistons and valves for over 50 years, controlling about 40-45% of the market in India for these products. They work with big vehicle makers, making about 64% of their money from these partnerships in 2023. They’re not just big in India but also sell their products worldwide to famous companies like BMW and Cummins, making them the top exporter of pistons and rings from India. SPRL is also getting ahead by focusing on cleaner engine technologies like CNG and hydrogen, dominating the CNG market with over 90% share. They’ve teamed up with some global giants since as far back as 1965 to keep bringing new, high-tech products to the market. Their big research centre in Ghaziabad, with more than 150 engineers, is where they create these innovations. Financially, they’re outperforming others in their field, grabbing two-thirds of the revenue share in the market and showing strong profits and financial health, which puts them at the top of the game in the automotive sector.

Evolving global landscape in ICE provides further headroom for growth

As the world shifts from traditional car engines to electric vehicles (EVs), Indian companies like SPRL, known for their expertise in engine parts, find themselves at a turning point. With India’s cost-effective manufacturing and innovative engineering, backed by government initiatives like ‘Make in India’ and special incentives, there’s a big chance for growth. The global move to diversify supply chains away from China (‘China+1’ strategy) also works in India’s favour. SPRL is getting ready to make the most of this change, aiming to be a key player in engine parts as long as these engines are still around. While electric cars are becoming more popular worldwide, the change is happening at different speeds in different places. Some places are slowing down on going fully electric and are more interested in hybrid cars, which still need engines. In India, electric two-wheelers are catching on faster than cars. This situation offers both challenges and opportunities for companies focused on engine parts, as they figure out how to fit into this changing car world.

Well-rounded approach by enhancing EVs and powertrain-agnostic technology capabilities through inorganic route

SPRL is getting ahead of the game by branching into the electric vehicle (EV) world while still strengthening its main products. They’ve started by buying a big part of EMF Innovations (EMFI) in Coimbatore for Rs. 78 crores. EMFI makes key parts for electric cars, like motors and controllers, and relies a lot on local suppliers. In just over five years, EMFI has made about Rs. 17 crores. SPRL made this purchase through a company they own, showing how serious they are about the EV market. They didn’t stop there; SPRL also bought 62% of Takahata Precision India, stepping into a broader range of products that aren’t just for traditional or electric cars. Takahata, which is really big in Japan, makes a variety of items, not just car parts, and brings in about Rs. 210 crores in sales. SPRL’s move to own more of Takahata by 2028 shows their big plans to grow in different tech areas, not just sticking to car engines.

Multiple drivers in place for robust financial performance going ahead

SPRL has been doing really well financially, with their earnings jumping from Rs. 2,064 crores to Rs. 2,609 crores in just a year, thanks to more people buying passenger and commercial vehicles, strong sales abroad, and in the parts replacement market. They kept this momentum going, with sales growing between 15.3% and 20.4% across the first three quarters of the following year. They’re looking at a 16-17% increase in sales for the whole year, driven by ongoing demand, new export customers, and an expanding parts market. Their profit margin before interest, taxes, depreciation, and amortisation (EBITDA) also improved significantly, thanks to smarter operations, cost cuts, automation, and selling a better mix of products. Even though the cost of materials has been going up, SPRL has managed by adjusting their prices. One of their companies, EMFI, didn’t do as well, but it’s not big enough to mess up SPRL’s overall profits. Looking ahead, SPRL is set to keep growing profitably, thanks to more production, smarter spending, and keeping up with market changes.

Valuation & Outlook

SPRL has been a big name in making car parts like pistons and engine valves for over 50 years, making it a top choice in India and helping it grow faster than others in its field. By working closely with major car makers in India and around the world, SPRL has seen a lot of success. Looking forward, it’s diving into the electric vehicle (EV) world by buying companies that specialise in EV parts, showing it’s ready to keep up with car industry changes. SPRL is also big on creating new things in-house and working with tech experts worldwide to stay ahead in the game. With India’s knack for cost-effective engineering and support from government initiatives, SPRL is well set to grow more, especially in selling abroad. Financially, it’s doing great, with expectations to keep increasing sales and profits in the coming years, thanks to its smart business moves and strong position in both the traditional and EV markets. This makes SPRL an appealing option for investors looking for a solid and forward-thinking company in the automotive sector. Based on these positives, we value the stock at 21x/18x its FY25E/FY26E earnings to arrive at a target price of Rs. 2,392 (22% upside from CMP) on a 12-month investment horizon.

Leave a Reply

Your email address will not be published. Required fields are marked *