Sterling Tools hits 5-year high, surges 10% on strong business outlook

Shares of Sterling Tools rallied 10 per cent to hit an over five-year high of Rs 392.60 on the BSE in Friday’s intra-day trade on strong business outlook. The stock of auto components & equipments company surpassed its previous high of Rs 390.60, touched on February 3, 2023.  It had hit a record high of Rs 478 on December 8, 2017.

In past six months, the stock has zoomed 76 per cent, as compared to 1.5 per cent decline in the S&P BSE Sensex. Further, in past one year, it has skyrocketed 160 per cent, as against a marginal 0.18 per cent gain in the benchmark index.

Sterling Tools is the 2nd largest automotive fastener manufacturer in India, with a well-diversified presence across all automotive segments and customers. It entered the electric vehicle (EV) space in 2020 and has become one of the largest e-2W MCU (Motor Control Unit) supplier in India. It has also started supplying MCUs for LCVs.

The company has reported a robust consolidated revenue growth of 64.7 per cent in April-December (9MFY23) to Rs 560 crore as compared to Rs 340.2 crore in corresponding period last year. The growth was primarily driven by increase in content per vehicle, overall robust industry demand & parts share of business (SOB) increase in select OEM’s.

The company’s consolidated profit after tax during the period more-than-doubled to Rs 40.1 crore from Rs 18.7 crore in a year ago period. Earnings before interest, taxes, depreciation, and amortization (ebitda) margin however, contracted 140 bps to 13.7 per cent from 15.1 per cent in 9MFY22.

The EV theme is the next big thing in the industry and the company is well positioned to expand out footprint in that vertical. The turnover in this vertical touches Rs 119 crore in 9MFY23 as compared to Rs 7 crore in 9MFY22.

The management said the company continue to focus on increasing sales in the EV vertical by catering to new OEMs, developing new products and sharpening its engineering capabilities. This strategy will enable the company to expand its footprint and grab market share, the management said.

EV penetration in 2W and 3W is expected to increase at a fast rate over the next few years which augurs well for the company’s growth. The collaboration with Meidoh for high tension fasteners could lead to higher orders from Japanese manufacturers. Sterling Tools has also invested in 3W cargo EV manufacturer which is showing rapid growth and could lead to a valuation uptick, analysts at HDFC Securities said.

With minimum capex requirement and strong cash flows, the management has guided for a growth of 15-18 per cent in FY24. Margins were impacted in FY22 due to company’s limited ability to pass on inflationary pressures. However, softening of raw material costs should lead to higher margins in the coming quarters, the brokerage firm said.

Sterling Tools maintains a conservative capital structure with low gearing levels and comfortable coverage indicators. “We expect Sterling Tools’ Revenue/EBITDA/PAT to grow at 26/31/51 per cent CAGR over FY22-FY25E, led by strong growth in EV business, higher share of specialised fasteners, improved realisations, and strict control on cost overheads,” the brokerage firm said in its initiate coverage report dated February 8, 2023.

The brokerage firm believe investors can buy the stock in Rs 355-360 band and add on dips in Rs 317-322 band (13.5x Dec’24E EPS) for a base case fair value of Rs 401 (17x Dec’24E EPS) and bull case fair value of Rs 425 (18x Dec’24E EPS) over the next 2-3 quarters.