Precision Camshafts: Premium for precision

Focus on value-added products and rising market share bodes well for revenue and margins

Precision Camshafts, a global supplier of camshafts which is a critical engine component, is raising Rs 240 crore to set up a new machining unit. While the overall issue size is Rs 400 crore, the rest of the proceeds is offer for sale from existing shareholders. The company, which has an eight per cent market share in the global passenger vehicle camshafts market, gets 78 per cent of its revenues from outside the country. Two of its largest clients are global majors Ford and General Motors, which together account for about 65 per cent of its revenue.

The company, which is among the top five global makers of camshafts, is looking to improve its market share as its expands its range as well as client base. While the firm has so far been manufacturing chilled camshafts, it is expanding its range to cover the other two camshaft technologies — ductile and assembled camshaft. Both the chilled and assembled camshafts have a 40 per cent market share each in the global passenger vehicle camshaft market of 100 million units worth Rs 7,000 crore.

What will aid the company’s growth is the increasing tendency of auto makers, who used to make this key product in-house, to outsource it to auto parts suppliers. This is on the back of increasing volumes and the need to keep costs down. A third of the overall camshafts continue to be manufactured in-house by auto makers. Given the long lead times for development and approval of new products and a limited number of players in the market, competitive intensity is unlikely to increase with weaker players expected to exit.

The company has seen its sales over the past five years grow at 17 per cent annually driven largely by an increase in volumes as well as favourable currency. While revenues are expected to see strong growth as the new volumes come on stream over the next two years, profitability should improve given the expansion which will increase the proportion of fully machined camshafts. Currently, Rs 149 crore of the annual revenues (Rs 532 crore) comes from machined camshafts and this number will increase, led by value-added products after the expansion coming on stream from FY18.

At the upper end of the price band and on a fully diluted equity base, the company is asking for a FY17 price-to-earnings valuation of 19-20 times. While there is little doubt about the prospects of the company given its track record of growth, execution and competitive strengths, the initial public offering (IPO) is priced at a slight premium to bigger peers such as Bharat Forge and Motherson Sumi. A discount would have made a more compelling case for investment. Given that the volume and profitability triggers are two years away, only those investors who have a time-frame of two-to-three years can look at the IPO.