Force Motors Ltd. share price target

Force Motors reported weak Q3FY18 result as volumes in OEM segments continued to disappoint. Net revenue increased 19.1% yoy, while Net profit declined 37% yoy due to fall in other income and higher tax cost. The company has witnessed pressure on its OEM volumes; however, rising sales from auto component segment supported revenue growth.

Force Motors reported subdued Q2FY18 result led by slowdown in OEM segment due to GST implementation from July 1, 2017; however, revenue decline from OEM was offset by growth in component business. Total revenue and EBITDA increased by 5.2% and 6.3% respectively, whereas PAT declined 17% on YoY basis.

We cut FY18/19/20E earnings in the range of 6-18%, factoring in weak OEM volumes. We value FML on 20x P/E on Sep-19EPS, with a TP of Rs 4876 (Rs 5186 earlier). Maintain BUY Force Motors 2QFY18 revenue came in at Rs 8.9bn (+5% YoY, 5% below estimates), impacted by lower volumes in the OEM segment (-8% YoY, 8.2k). This was offset by growth in sub-contracting. EBITDA margin came in at 8.9% (Rs 798mn, 6.3% YoY), expanded by 89bps YoY, owing to cost control measures. APAT fell 14% YoY to Rs 417mn, led by a fall in other income (-50% YoY to Rs 94mn) and an increase in depreciation (+21% YoY).

Force Motors reported poor set of Q1FY18 result led by de-stocking in OEM segment due to GST implementation from July 1, 2017. Total revenue declined 1.2%, whereas EBITDA and PAT declined 48.1% and 41.8% respectively on YoY basis.

We cut FY18/19E earnings est by 10/5%, factoring in weak 1QFY18 numbers. We value FML on 20x P/E on Jun-19EPS, hence our TP is Rs 5186 (Rs 5350 earlier). Maintain BUY Force Motors 1QFY18 was adversely impacted by lower volumes in the OEM segment, owing to de-stocking undertaken by dealers ahead of GST implementation. Net revenue at Rs 7.5bn was dragged down by a 8% decline in the automotive business. This was offset by 9% growth in sub-contracting (auto comp). EBITDA margin at 5% (Rs 373mn) was hit by a fall in OEM revenue and higher input cost (as seen in higher RM expenses - +393bps YoY). APAT fell 42% YoY to Rs 300mn.

Force Motors' Q4FY17 numbers were marginally below our expectations. Revenue fell 6.8%, whereas EBITDA and PAT declined 14.3% and 25.3% respectively on YoY basis. We remain positive on the business of the company and expect strong growth from auto component segment. We are bullish on luxury cars segment (auto component segment) and Force's dominance in LCV space (traveller segment).

Exports to Drive Revenue: Q4FY17 revenue stood at Rs. 8376Mn as against Rs. 6291Mn in Q3FY17 recording a growth of 33.1% QoQ driven by volume growth of 38.5% at 9512 vehicles. However, on YoY terms revenue declined by 6.8% on account of volume de-growthby 5.6% mainly led by BS-III ban.

Force Motors (FML) 4Q numbers were marked by better operational performance (despite revenue being below estimates from the sub-contracting business). The trajectory of margin recovery (at 11% vs exp of 8.4% QoQ) was encouraging. EBITDA at Rs 919mn (-14% YoY, 218% QoQ), benefitted from lower `other operating expenses (-102bps YoY).

Recent interactions with dealers across the country have convinced us that the luxury car market in India has great scope for growth. Sales of luxury cars account for less than 1.3% of the Indian car market, reflecting a huge untapped space. Aspirational demand from India?s middle class has led to proliferation of dealerships of luxury car brands (like Audi, BMW, Mercedes, Bentley, Bugatti, Rolls Royce and Porsche) into Tier II cities.

Force Motors's Q3FY17 numbers were below expectations led by demonetization. Revenue fell 14.2%, whereas EBITDA and PAT declined 39% and 14.8% respectively on YoY basis. Nevertheless, we remain positive on the business of the company and expect recovery to happen soon as the liquidity crunch situation normalizes. We are bullish on luxury cars segment (auto component segment) and Force's dominance in LCV space (traveller segment) and thus recommend a Buy on the stock.

Force Motor?s 3QFY17 was adversely impacted by the government?s demonetisation initiative. Net revenues at Rs 6.2bn were dragged down 14% YoY by a 13% degrowth in automotive and 17% fall in sub-contracting (auto comp). EBITDA margin at 4.6% (Rs 289mn) was hit by deleverage, as seen in higher employee expenses ( 475bps YoY). APAT fell 15% YoY to Rs 233mn.

Force Motorss 2QFY17 EBITDA margin at 8.9% (Rs 750mn) was below estimates owing to higher than expected other expenses ( 50bps QoQ) and slightly lower topline. Net sales at Rs 8.4bn ( 12% YoY, 13% QoQ) were a miss on lower sub-contracting (3.5% below est.) revenue. APAT stood at Rs 493 mn ( 16% YoY).

Initiate coverage with a BUY rating and target price of Rs 4,485 (based on 20x Sept-18E earnings). Our target multiple for FML (at a 33% premium to its historical mean) is premised on its robust earnings outlook, margin expansion and improving return ratios as asset sweating rises with volumes.

Force Motors Ltd (FML) is a fully integrated company with expertise in design development and manufacture of the full spectrum of automotive components, aggregates and vehicles. It sells vehicles including small commercial vehicles, multi-utility vehicles, light commercial vehicles, sports utility vehicles and agricultural tractors. The company operates its business under three verticals- vehicle manufacturing, component manufacturing and tooling for other OEMs. Vehicle business contributes 70% and the rest contribute 30%. The company exports to various...

Since our first coverage of Force Motors Ltd. (FML) in February 2015, the stock has more than doubled, in just about 8 months. With all segments of its business poised for an uptick, trading at 23.1X its FY17E EPS, we believe it is strong long term investment idea. FML is automobile company with focus on designing, development and manufacturing of vehicles mainly LCV, UV's and tractors and auto components. FML enjoys the market leadership position of 61% share in the LCV passenger segment in India. Force also has technical collaboration with Daimler AG, Germany in respect of multi-purpose passenger vehicles. FML partnered with Indian arm of German luxury auto maker BMW in its strategy for...