 "auto components")
Brokerage firm LKP Securities on Friday initiated coverage on automotive component manufacturers Sansera Engineering, with a 'buy' rating, with a target price of Rs 1,235, translating into an upside potential of 21 per cent.
That said, Sansera Engineering’s shares have shown a robust performance, climbing 10.63 per cent in the past month, outpacing the S&P BSE SmallCap index by 2.81 per cent.
As of 11:02 am, shares of the company were trading 2.75 per cent higher at Rs 1,060.70 per share.
Here's why the brokerage has initiated a buy call:
Robust engineering prowess
The brokerage's positive outlook is based on Sansera's strong engineering capabilities, which enable it to broaden its market reach both in terms of products and geographic presence. Investments in non-auto sectors like aerospace and defence are expected to diversify revenue streams, reducing reliance on the automotive sector, particularly the two wheeler (2W) internal combustion engine (ICE) business in India.
“We also believe that the company shall continue to post consistent organic growth outpacing peers through expanding their client base both in domestic and international markets. Structural changes occurring on the customer side wherein most of the original equipment manufacturers (OEMs) are switching from in-house based model to outsourcing model for components in which Sansera in market leader shall augur well for Sansera,” the brokerage said in a note.
Order book
Sansera’s order book stood at approximately Rs 2,040 crore as of December quarter (Q3FY24), with a major portion (53 per cent) from tech-agnostic and non-auto segments. Meanwhile, 59 per cent of these new orders are from global clients and 41 per cent from domestic ones. The company's focus on global clients and anticipated revival in exports are expected to drive strong topline growth.
Strong client relations
With its comprehensive capabilities, Sansera has forged strong relationships with major players in the automotive industry, both domestically and internationally. The company's expansion into new markets and its long-standing ties with existing clients position it well for sustained growth.
Notably, the company is set to begin supplying to Tesla in financial year 2024 (FY24), and is optimistic about winning over additional business as well over the next few years.
Over the years, Sansera has expanded its client base in countries like the US, the UK, China, Brazil, Argentina, Indonesia, Italy, Sweden, and Thailand.
Cost-saving strategies
The company has been aggressively investing in research and development (R&D) and product development and has a team of 506 dedicated engineers supporting research in automotive, aerospace, machine building, automation & technical functions.
Sansera claims to have more than doubled its research staff from 201 in financial year 2021 (FY21) to 506 in financial year 2023 (FY23), as it has shifted its focus to the non-automotive and tech-agnostic & xEV segments along with product development in the auto space.
Premiumisation
The trend of premiumisation in the automotive sector, particularly in 2Ws and passenger vehicles (PVs), bodes well for the company, according to analysts at LKP Securities.
The proportion of entry-level motorcycles in the overall motorcycle market has decreased from 83 per cent in financial year 2014 (FY14) to 72 per cent in financial year 2024 (FY24), while the premium segment has seen its share rise from 17 per cent in FY14 to 28 per cent in FY24.
“Going ahead, the premiumisation trend is set to further pick-up which is evident from the fact that OEMs are focusing on premium products and have lined up several new model launches in the segment. Further, product lifecycles have reduced considerably as compared to 10 years back, thus increasing the frequency of new model launches,” the brokerage said.
EV proliferation
Sansera's focus on non-automotive segments, coupled with its lean cost structure, positions it favourably amid the proliferation of EVs. The company's capacity to cater to the evolving needs of its clients and its distinct cost advantage are key strengths in this evolving landscape.
Expansion initiatives
The completion of a new machining facility and the commencement of construction on a new forging plant are expected to further enhance Sansera's capabilities, particularly in the non-automotive segment.
Risks
While Sansera's diversified portfolio mitigates some risks, factors such as slower-than-expected growth in the domestic 2W market, currency fluctuations, and the rise in EV penetration pose potential challenges.
