Z F Steering Gear (India) Ltd - 170.00 Rs
Belonging to well known Firodia group of Kinetic fame, Z F Steering Gear India Ltd (ZF) was incorporated in 1981 to manufacture mechanical - worm & roller and power steering gears in financial and technical collaboration with M/s. ZF Friedrichafen AG Germany, world's largest independent steering gears manufacturer. Today, ZF is market leader in both mechanical and hydraulic power steering gears especially for commercial vehicles and tractor industry. Its product range includes ball and nut power steering gear, rack and pinion power steering gears, worm and roller manual steering gears, intermediate shafts, vane pumps, steering columns, bevel gears box, universal joints, servocom steering gear etc. It has an enviable clientele including all auto majors like Tata Motors, Ashok Leyland, M&M, Eicher Motors, Escorts, Bajaj Tempo, Swaraj Mazda, PunjabTractors, Volvo, L& T John Deere, New Holland etc. Off late, it has entered passenger car segment by supplying rack & pinion power steering gears for ‘Indica’ car. In near future, company is looking to develop new products such as collapsible steering column for cars, telescopic steering columns for HCV, aluminum pump for higher HP engines, pump parts localization etc
ZF’s state-of-the-art manufacturing plant at Pune-Maharashtra is equipped with advanced specially designed machinery from ZF Germany for manufacturing critical components and has its own in-house heat treatment facility consisting of sealed quench furnaces, pit carburised furnaces for case carburising, nitriding etc. To cater the rising demand, company has expanded its installed capacity of power steering fears from 150,000 to 240,000 per annum and of mechanical steering gears from 100,000 to 120,000 per annum at a capital expenditure of approx. Rs. 7 crore. Moreover, in view of encouraging response from the automobile manufacturers, ZF is in the midst of further expanding the production capacity to 300,000 units of power steering gears and 150,000 units of mechanical steering gears. Secondly, it has entered into a 26:74 joint-venture with its collaborator ZF Lenksysteme, GmbH, to promote a new company for developing and manufacturing new products which will be different and not competing with its current product range. Importantly, sales of commercial vehicles are increasing due to improvement in road-infrastructure and also the ruling of Supreme Court to ban overloading of commercial vehicles. It recorded a growth of 33%, producing 520,000 vehicles during 2006-07 compared to 391,083 vehicles in the previous year. On the other hand, tractors also recorded 20% rise in sales on the back of increased focus by the government in providing subsidies. Thirdly, with India emerging as the hub for small-car manufacturing, many players have announced capacity expansions and many new international-players have taken initiative in setting-up their state-of-art production facilities in India. And since ZF’s future prospects are closely linked to the demand for commercial vehicles, multi-utility vehicles and tractors, it is expected to do much better in the coming years.
Financially, ZF is by and large a debt free company. Infact, it has invested around 37 cr in unlisted firms which yields handsome dividend in form of other income. Promoters currently hold about 72% of the equity, of which German collaborator is holding 26% stake and Bajaj Tempo holding nearly 10% stake. Management of the company is very professional and investor friendly with an impeccable track record of uninterrupted dividend payment since last two decades. For FY08 they have again announced 80% dividend which gives a yield of almost 5% at CMP. Ironically, ZF has still not tapped the global market which presents a huge opportunity to be explored in future. At the same time with zero revenue from exports it is not affected by the sharp rupee appreciation unlike other auto ancillary companies. For FY08 it registered very marginal growth in sales as well as net profit to Rs 223 cr and Rs 27.85 cr respectively. Still this works out to an EPS of Rs 31 on equity of Rs 9.07 cr. Considering its debt free status with healthy cash EPS of Rs 45, huge reserves of Rs 100 cr, strong promoter holding, high dividend yield, company is available extremely cheap at Enterprise value of Rs 155 cr i.e. at an EV/EBIDTA of merely 3x times. However import of cheaper power steering gears from China and steep rise in raw material cost is a big threat to the company. Investors are advised to buy for a price target of Rs 240 (i.e. 40% return) in 12~15 months.
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