ASK Automotive: Play on 2W recovery and some more

28 Mar 2024 , 12:37 PM

ASK is the leader in 2W braking and a sizeable player in aluminium casting; deriving ~90% of revenues from 2Ws. ASK’s products are largely engine-agnostic; electrification results in increase in content per vehicle. Over the years, ASK has consistently outpaced growth in the underlying 2W industry. Analysts of IIFL Capital Services expect this to continue in the coming years and forecast 15% revenue growth against an underlying 2W industry growth of 9-10%. Revenue outperformance would be driven primarily by the Aluminium segment, backed by new orders including exports and entry into 2W alloy wheels. Analysts of IIFL Capital Services see multiple levers, which should drive 300bps margin expansion over FY23-26. Overall, we forecast 32% EPS Cagr over FY23-26. Long-term ROE/ROCE have averaged 20%+; analysts of IIFL Capital Services expect them to inch up to ~25% by FY26. Analysts of IIFL Capital Services initiate coverage with BUY and TP of Rs360 (25x FY26 EPS), implying a 33% upside.

Leadership and consistent outperformance vs underlying industry:

ASK is the leader in 2W braking — an industry with high entry-barriers. Braking is a cash-cow with mid-to-high single-digit growth potential, high margins and FCF (no expansion capex). Analysts of IIFL Capital Services expect Aluminium segment to grow at 22% Cagr, with market-share gains, new orders incl. exports and entry into 2W alloy wheels. Products are engine-agnostic, with potential for higher ‘content per vehicle’ in EVs. Overall, ASK should outperform the underlying 2W industry, as it has in the past. Over the past 10 years, ASK’s revenues are up 5.5x vs the 2W industry production that is up 1.2x.

Forecast 32% EPS Cagr, well supported by margin normalisation:

Analysts of IIFL Capital Services expect Ebitda margin to improve 300bp from 9.3% in FY23, driven by: i) normalisation of high input costs in FY23 ii) operating leverage from higher capacity utilisation iii) incentive from Rajasthan government (against capex on new plant) iv) savings on power cost (solar energy). Analysts of IIFL Capital Services expect margins to reach 12.2% in FY26, close to its pre-Covid average margin (FY13-FY20) of 12.0%.

Strong return ratios (20%+) and FCF:

ASK clocked ~20% ROE/ROCE in FY23. Analysts of IIFL Capital Services expect return ratios to improve further to ~25% by FY26ii, led by margin expansion and higher capacity utilisation of the newly set-up plant in Rajasthan. Capex was high in FY24 (Rajasthan plant). As capex comes off in FY25, analysts of IIFL Capital Services expect ASK to generate strong positive FCF.