New Die Casting Capacity And Overseas Weakness Will Pressure Margins Yet Offer Long-Term Upside

Catalysts

About Sandhar Technologies

Sandhar Technologies is a diversified automotive component manufacturer with operations across India and overseas, supplying locking systems, vision systems, die casting, sheet metal, cabins and EV components to leading OEMs.

What are the underlying business or industry changes driving this perspective?

• Although the India business is delivering strong double digit top line growth with improved normalized margins, the drag from loss making overseas operations and integration costs from recent acquisitions could delay a sustained uplift to consolidated EBITDA margin and earnings beyond management’s near term 10 percent guidance.
• Despite increasing penetration with key two wheeler and passenger vehicle OEMs, including growing content from smart locks and premium vision systems, the shift toward alloy wheels, changing product mix and pricing pressure from OEMs could cap realizations and limit operating leverage on revenue growth.
• While the ramp up in aluminium die casting capacity, including the Sundaram Clayton unit and new Pune and South India projects, positions the company to benefit from higher casting content in vehicles, relocation expenses, subscale utilization in the early years and low initial margins in new plants may suppress net margins even as revenue scales.
• Although early traction in EV components such as battery chargers, motor controllers and DC DC converters aligns with long term electrification of mobility, the current small revenue base, intense competition and potential technology shifts could restrict the contribution to consolidated earnings for several years.
• While management is targeting higher return on capital employed through consolidation, cost optimization and financial reengineering in Europe and Romania, continued volatility in European auto demand, currency translation impacts and elevated borrowing costs could keep ROCE and earnings growth below aspirations in the medium term.

Assumptions

This narrative explores a more pessimistic perspective on Sandhar Technologies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Sandhar Technologies's revenue will grow by 15.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.0% today to 4.6% in 3 years time.
• The bearish analysts expect earnings to reach ₹3.1 billion (and earnings per share of ₹51.25) by about December 2028, up from ₹1.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.9x on those 2028 earnings, down from 19.4x today. This future PE is lower than the current PE for the IN Auto Components industry at 32.4x.
• The bearish analysts expect the number of shares outstanding to decline 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 15.69%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent margin pressure from new die casting and sheet metal projects, including Sundaram Clayton and the upcoming Pune and South India plants, could mean that despite strong top line growth the business fails to reach or sustain the targeted 10 percent to 11 percent consolidated EBITDA margin, which would weigh on earnings growth.
• Ongoing volatility in European auto demand, currency translation impacts between the euro and rupee, and only gradual recovery in Romania and other overseas units could prevent the international operations from returning to historic low double digit EBITDA margins. This could limit consolidated profitability and depress net margins.
• The structural shift in two wheeler wheels from spokes to alloy, alongside premiumization in segments where Sandhar has weaker product positions, could lead to a shrinking assemblies business that is not fully offset by gains in other verticals. This could constrain long term revenue growth.
• High and recurring capital expenditure, combined with elevated working capital needs and a debt load in the INR 850 crores to INR 900 crores range, may cap returns on capital employed below the 18 percent aspiration and reduce financial flexibility. This could dampen both earnings and valuation multiples.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Sandhar Technologies is ₹626.0, which represents up to two standard deviations below the consensus price target of ₹693.67. This valuation is based on what can be assumed as the expectations of Sandhar Technologies's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹825.0, and the most bearish reporting a price target of just ₹626.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be ₹66.5 billion, earnings will come to ₹3.1 billion, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 15.7%.
  
• Given the current share price of ₹559.85, the analyst price target of ₹626.0 is 10.6% higher.
  
• 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.