Acquisition Of Motherson Marelli Assets And New Gas Springs Will Strengthen Future Market Position

Key Takeaways

• Asset acquisition and new product lines expand Gabriel India's market position, driving revenue growth and future OEM requirements.
  
• Synergies and export growth are expected to enhance net margins and revenue, cushioning against domestic market fluctuations.
  
• High CAPEX and operational integration risks from acquisitions, coupled with increasing competition and EV demand shifts, could strain Gabriel India's profitability and growth.

Catalysts

Manufactures and sells of ride control products to the automotive industry in India, the Netherlands, and internationally.

• The recent acquisition of assets from Motherson Marelli Auto Suspension Parts offers Gabriel India an expanded product portfolio and increased production capacity, which could drive revenue growth through enhanced market position in the suspension market.
  
• The introduction of a new product line, the gas springs, along with technology advancements through an agreement with Marelli Suspension Systems Italy, is likely to boost the company's revenue by meeting advanced future OEM requirements.
  
• The potential synergies from the recent acquisition, including improved product lines and customer portfolios featuring major players like Tata and Maruti, are expected to translate into higher net margins as operational efficiencies and cross-selling opportunities materialize.
  
• The sunroof business is on track to double its capacity by the end of calendar year 2025, driven by strong demand and new vehicle launches, potentially leading to significant revenue growth and contributing positively to earnings.
  
• The focus on export growth, targeting a substantial increase to achieve 10% of total revenue from exports, is expected to enhance overall revenue and earnings while buffering against domestic market fluctuations.

Gabriel India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gabriel India's revenue will grow by 12.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.9% today to 6.7% in 3 years time.
• Analysts expect earnings to reach ₹3.7 billion (and earnings per share of ₹25.95) by about March 2028, up from ₹2.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.1x on those 2028 earnings, down from 36.5x today. This future PE is greater than the current PE for the IN Auto Components industry at 27.1x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.97%, as per the Simply Wall St company report.

Gabriel India Future Earnings Per Share Growth

Risks

• The high CAPEX requirement and current asset utilization issues for Gabriel India could strain future profitability, impacting net margins if demand doesn't align with expanded capacity.
  
• The recent acquisition of Marelli Suspension's assets, which has been marginally profitable, could challenge profitability and return on investment, leading to risks in achieving Gabriel’s desired EBITDA margins.
  
• Increased competition and potential margin pressures in the sunroof market from new entrants and localization could impact Gabriel's revenue growth and profitability.
  
• The shift in the EV industry from FAME to the PM E-Drive program has reduced subsidies, potentially dampening demand for electric 2-wheelers, affecting Gabriel's revenue from this segment.
  
• Operational integration risks associated with the Marelli acquisition, including the synchronization of technology and customer synergies, if not effectively managed, could delay Gabriel's ability to realize the anticipated growth and revenue synergies.

Valuation

• The analysts have a consensus price target of ₹562.0 for Gabriel India based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹650.0, and the most bearish reporting a price target of just ₹445.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹55.4 billion, earnings will come to ₹3.7 billion, and it would be trading on a PE ratio of 32.1x, assuming you use a discount rate of 14.0%.
• Given the current share price of ₹583.1, the analyst price target of ₹562.0 is 3.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.