Ceekay Daikin Ltd - Rs.87.00

Established in 1973, Ceekay Daikin Ltd. (CDL) is a leading manufacturer of clutches i.e. Clutch cover assembly and clutch disc for 4-wheelers and light commercial vehicles (LCVs) in India. In fact, it is India's largest manufacturer of diaphragm-type clutches apart from making coil type, DST type and clutch disc regular to silent type ranging from dia 155–381 mm. It commands a market share of 30% in the passenger car segment, 80% in the LCV segment and has a minor presence in the tractor segment. It caters to most OEMs such as Tata Motors, M&M, Swaraj Mazda, Toyota, Ford India, Hindustan Motors, GM India, Bajaj Tempo, Eicher Motor, Premier Auto, TAFE and Honda Siel. Maruti is the company’s largest customer contributing 33% of its top-line and 50% of the Maruti cars sold have CDL clutch assemblies. The company has an equity/ technical collaboration with Exedy Corporation (formerly known as Daikin Manufacturing Co.), Japan, who is the world leader in clutches and hold more than 30% stake in the company.

CDL operates in three shifts from two units based in Greater Noida and Aurangabad having a cumulative capacity to manufacture 15 lakh clutch plates and 11 lakh clutch covers per annum. It has vertical manufacturing process where all key components are manufactured in-house and is equipped with processing facility for pressing, machining, heat treatment, tool room, diaphragm spring and wire ring facilities. Both the facilities are TS16949 and ISO certified and for the first time CDL has touched a production and sales of 10 lakh clutch discs and 9 lakh clutch covers in 2005-06. Although it has installed capacities, it is investing around Rs.15 cr. in two years for adding balancing equipments and de-bottlenecking its existing clutch cover/disc assembly lines to meet the increasing demand and to set up a component facility at its Noida factory. Due to its non-competing agreement with Exedy Corp., its exports are restricted only to North America, Indonesia, Singapore, Srilanka, Australia and Europe. Hence to boost its top-line, the company is trying to increase its presence in the replacement market. Also, there is a possibility that Exedy Corp may start outsourcing from CDL due to lower manufacturing cost.

Fundamentally as well as financially, CDL is quite strong but has a Rs.45 cr. of high interest bearing debt on its books, which hampers its performance and eats away its major profit. However, the company is negotiating to bring down its interest cost further which may boost the bottom-line going forward. For FY06, its sales improved by 25% to Rs.86 cr. but its net profit increased by whopping 125% to Rs.5 cr. registering an EPS of Rs.13 on its tiny equity of Rs.4 cr. Although the first qtr was not that encouraging, still it is expected to clock a turnover of Rs.100 cr. and profit of Rs.6.50 cr. for FY07, which translates into EPS of Rs.16. To fund its expansion, the company may come out with a right issue or preferential allotment in the near future, which may dilute its equity to some extent. But at the current market cap of Rs.35 cr. and a P/E multiple of 5.5, this company is trading reasonably cheap and deserves much higher valuation. Investors are strongly recommended to buy it at current levels with a price target of Rs.120 (30% return) in 9-12 months.