EV And Wind Energy Headwinds May Limit Auto Upside Yet Long-Term Outlook Remains Constructive

Catalysts

About Sundram Fasteners

Sundram Fasteners manufactures engineered fasteners and related components for automotive and industrial applications in domestic and global markets.

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

• Although domestic auto volumes and share gains in passenger cars and tractors are currently supporting double digit growth, any prolonged softness in global CV and Class 8 truck cycles could offset these gains and cap consolidated revenue growth and operating leverage benefits on earnings.
• While wind energy fasteners are scaling from recent capital expenditure of around INR 180 crores and could structurally deepen the non auto mix, execution delays in project rollouts or intensified competition may limit the anticipated uplift in return on capital employed and overall net margins.
• Although the aftermarket and OE spares business offers a higher margin profile and management is expanding product range and distribution reach, slower than expected channel ramp up could restrict the contribution from this annuity like revenue stream and temper margin resilience in downcycles.
• While EV and fuel agnostic engine platforms provide medium term visibility with fungible capacities already in place, continued deferrals of customer programs and lower content per vehicle versus ICE could constrain the pace of revenue accretion and delay operating margin expansion.
• Although diversification into aerospace, industrial fasteners and new areas such as stainless steel and railway fasteners broadens the end market base, longer qualification cycles and smaller initial order sizes may mean that the impact on consolidated revenue scale and earnings growth materializes more slowly than current capacity and capex would suggest.

Assumptions

This narrative explores a more pessimistic perspective on Sundram Fasteners 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 Sundram Fasteners's revenue will grow by 10.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.2% today to 11.2% in 3 years time.
• The bearish analysts expect earnings to reach ₹9.0 billion (and earnings per share of ₹43.59) by about December 2028, up from ₹5.5 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 36.7x on those 2028 earnings, up from 35.5x today. This future PE is greater than the current PE for the IN Auto Components industry at 32.4x.
• The bearish analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.77%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Export revenues remain under pressure if the North American Class 8 truck cycle stays weak, EPA 27 related uncertainty persists and tariff or geopolitical frictions continue. This could constrain consolidated revenue growth and dull operating leverage.
• Dependence on rupee depreciation and currently soft raw material costs to support margins may reverse if the currency strengthens or steel prices rise again, which would compress gross margin and EBITDA margin from present highs.
• Customer deferrals and slower than expected adoption of EV programs in North America and domestic markets, combined with lower content per EV versus ICE, could leave new capacities underutilized and weigh on earnings growth and return on capital employed.
• High exposure to cyclical auto segments in India and abroad, including commercial vehicles and passenger vehicles, means any broader slowdown in economic activity or auto demand could offset gains from non auto diversification and pressure revenue and net profit.
• Newer non auto and niche segments such as wind energy, aerospace, stainless steel and railway fasteners face competition, long qualification cycles and project timing risks, which could delay the scaling of these businesses and limit their contribution to consolidated margins and earnings.

Valuation

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

• The assumed bearish price target for Sundram Fasteners is ₹1040.0, which represents up to two standard deviations below the consensus price target of ₹1241.75. This valuation is based on what can be assumed as the expectations of Sundram Fasteners'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 ₹1576.0, and the most bearish reporting a price target of just ₹1040.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be ₹80.9 billion, earnings will come to ₹9.0 billion, and it would be trading on a PE ratio of 36.7x, assuming you use a discount rate of 14.8%.
  
• Given the current share price of ₹936.1, the analyst price target of ₹1040.0 is 10.0% 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.