The automotive industry is going through a churn, with disruptions from electric vehicles to self-driving vehicles. The entire mobility space will have to adapt, right from the humble scooter to luxury cars and commercial vehicles. This has widened the role of auto ancillary manufacturers, who are contributing value additions like internet-enabled infotainment systems, smart lighting, exhaust systems that reduce pollution, etc. to every new model entering the markets. The opportunities here lie right from making advanced electronic systems to digital keys, interior finishes, and even improvised design of basic components of vehicles. 

Jamna Auto Industries is the largest manufacturer of suspension springs for commercial vehicles in India, and the third-largest in the world. Its customers include all the major commercial vehicle manufacturers like Tata Motors, Ashok Leyland, Volvo, Bharat Benz, etc. It manufactures products like leaf springs, parabolic springs, air suspensions and lift axles, etc.

Despite facing numerous challenges in FY21, including a slowdown in commercial vehicle sales, the pandemic, and other logistics challenges, Jamna Auto Industries’ stock delivered 3X returns till August 2021 from its lowest point in March 2020.

Quick Takes

• Net profits grew about 50% YoY to Rs 73 crore in FY21 due to  contributions from value-added products and new markets

• The company achieved better margins in FY21 via cost optimisation, leading to a lower break-even point

• Revamp of IT infrastructure and implementation of ERP (enterprise resource planning) system at one plant in FY21 and target to complete all eight plants by FY24 for improved production efficiency and logistics

• Q1FY22 impacted due to the second wave with lockdowns in different states and limited time for business operations

Improving profitability despite slowing revenue growth

The company’s products are suspension systems for commercial vehicles and the company’s fortunes are entirely linked to the demand and sales of commercial vehicles. Any analysis on Jamna Auto should be seen with respect to its dependence on commercial vehicle sales.

The commercial vehicle industry is facing challenges over the last couple of years due to multiple factors like revised axle norms, and transition to BS6 norms. The industry saw a 30% drop in YoY sales in FY20, even before the onset of the Covid-19 pandemic. Trying to reconcile with this sudden drop, the industry had to bear the impact of the pandemic throughout the next year, resulting in the lowest sales numbers in the last five years, in FY21.

After declining sales for around two and a half years, the commercial vehicle industry is now showing signs of revival. In Q4FY21, manufacturers have also seen improvement on a YoY basis. However, the second wave halted the improving growth trajectory of the previous few quarters in Q1FY22.

The revenue trend for Jamna Auto over the last five years mirrors the sales of commercial vehicles. Despite its lowest revenues in FY21 over the last five years, the company was able to improve its net profits with a YoY increase of 50% at Rs 73 crore.

The company improved its margins in FY21 on account of the initiatives taken by the management. The company reduced the breakeven point, through cost rationalisation. Value-added products and newer markets contributed to higher revenue share and led to a reduction of debt.

Chairman Randeep Singh Jauhar said, “I’m proud to say this teamwork has resulted in reducing our breakeven point to less than 25% of our capacity; achieving a free cash of Rs 190 crore, all of which helped in deleveraging of our balance sheet.”

Affected by the onset of the pandemic, Q1FY21 was the only loss-making quarter in the last eight quarters. The next three quarters saw net profits rising till Q4FY21 and declined in Q1FY22 due to the second wave of Covid-19. This is also reflected in the EBITDA (earnings before interest, tax, depreciation, and amortization) numbers which dropped in Q1FY22 due to the second wave.

New products, new plants, and revamp of IT infrastructure

The company plans to launch new products like machining products, U-Bolts, hanger shackles, and spring pins at their subsidiary facilities in Pant Nagar and Indore. The Pant Nagar unit is expected to start commercial production in the latter half of FY22. The Indore project delayed due to Covid-19 is expected to start commercial production by FY23.

Jamna Auto, in the past year, worked on improving its IT (information technology) infrastructure. Ramco Systems is the chosen IT partner and completed the implementation of ERP (enterprise resource planning) software in the Yamuna Nagar plant and the same is in progress at the Chennai plant. The company targets to complete ERP implementation across all eight plants by FY24. This will lead to better efficiency in production and logistics. Apart from ERP, digital channels are created for distributors and retailers for better reach and improved inventory management. 

Prudent fiscal management helps tide over challenging times 

One metric where Jamna Auto scores high is in ROCE (return on capital employed). ROCE is one of the several profitability ratios used to evaluate a company's performance. It is designed to show how efficiently a company makes use of its available capital by looking at the net profit generated in relation to every rupee of capital utilized by the company. 

While companies in the auto ancillary industry cannot be compared at par due to the complexity of products and type of vehicle where they find application, ROCE is one financial ratio that can determine which companies in this space are utilising capital more efficiently. 

Jamna Auto has historically had a high ROCE of more than 40%, which fell below this level in FY20 and FY21. For the three-year period, Jamna Auto generated the highest ROCE, except in FY20 where only Endurance Technologies and Sundram Fasteners generated higher ROCE than Jamna Auto.

Scrappage policy, reopening of schools will boost Jamna Auto products

The vehicle scrappage policy announced by the government in August 2021 is set to be one of the triggers for Jamna Auto. According to the policy, new commercial vehicle registrations will be valid only for ten years. Post this period, the vehicles will have to go through a mandatory fitness test. For vehicles that outlive their utility, the scrappage policy offers a rebate on new vehicles purchased in place of old one and there are tax concessions proposed for new vehicles. This will set in place a shorter replacement cycle.

Another push for commercial vehicles is coming from the e-commerce industry. The pandemic has given a big fillip to e-commerce. Commercial vehicles are in demand for last-mile connectivity in e-commerce operations. This trend is expected to continue due to the convenience of e-commerce and home delivery, which people are more comfortable with post-pandemic.

One area where Jamna Auto products will find demand in new as well as replacement markets is buses. Since March 2020, most schools are closed and even corporate transport is a fraction of what it was prior to the pandemic, the buses are idle. With the return to normalcy expected in the next few quarters, there would be a surge in demand for new buses as well as repair and replacement of parts of these idle buses. 

Jamna Auto Industries has a roadmap laid out called ‘Lakshya 50XT’ with the objective of meeting targets for the next five years. This plan targets growth and product diversification. Key targets include generating 50% revenue from new markets including 10% from exports, 50% revenue from new products, ROCE of 50%, and a dividend payout of 50%. Investors can use this benchmark to keep a track of the company's progress.

Jamna Auto has responded to challenges in the past two years and is showing signs of getting back on track in tandem with the revival in the commercial vehicles industry. With an ambitious roadmap in place, FY22 might just see the company spring back into action.