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HDFC Securities Retail Research
We expect ZF Steering Gear India Ltd.'s revenue/Ebitda/profit after tax to grow at 12/22/39% compound annual growth rate over FY23-FY25E, led by the improvement in demand scenario for commercial vehicle and tractors.
We expect Ebitda margin to expand by ~250 basis pointss to ~15% and return on equity to increase from ~6% in FY23 to ~10% by FY25E.
We believe investors can buy the stock in the band of Rs 768-784 and add on dips in Rs 695-710 band (13.5 times FY25E earnings per share) for a base case fair value of Rs 845 (16.25 times FY25E EPS) and bull case fair value of Rs 910 (17.5 times FY25E EPS) over the next two-three quarters.
ZF Steering Gear is a key supplier of steering systems to the CV and tractor segments of the automobile industry. Overall, the domestic medium and heavy commercial vehicle and tractor steering systems market is primarily duopolistic, with ZFI and the Rane Group driving ~90% of the market share.
The use of power steering in M&HCV and tractors has been increasing over the years due to the need and ease of use for the driver of the vehicle.
Further the cost of power steering as compared to the total vehicle cost has come down significantly resulting in higher adoption by companies.
The Indian CV cycle has witnessed strong growth in FY23 and expected to grow in the range of 2-4% in FY24.
Higher utilisation of capacities would lead to better operating leverage and margin expansion for the company. ZFI has also taken steps for backward integration. It has incorporated two wholly owned subsidiaries and land has also been allotted. Better cost control over input would further add to the margins.
Key triggers
Commercial vehicle sales growth to moderate in FY24.
Backward integration to reduce manufacturing costs.
Strong position in domestic steering systems industry for M&HCVs and tractors.
Margin expansion on increased capacity utilisation.
Risk and Concern
Vulnerable to cyclicality in demand from CV/tractor OEMs.
Elevated commodity and fuel prices.
Increasing vehicle prices.
Rising competition.
Low return ratios.
Litigation by ZF group.
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