37% upside! Newly-listed Uniparts India shares offer high margin of safety, says JM Financial
JM Financial has initiated coverage on Uniparts India, with a ‘Buy’ rating and a price target of Rs 780 that suggests a potential 37 per cent upside. The brokerage cited ‘margin on safety’ on the counter and felt the supplier of systems and components for the off-highway vehicles (OHV) deserves higher valuations.
Uniparts India had made a muted market debut in December last year. The scrip had got listed at Rs 575 on BSE against the issue price of Rs 577. In Tuesday’s trade, the scrip stood at Rs 576.30 a piece. JM Financial’s price target factors in a PE multiple of 14 times on global leadership, a 20 per cent return on equity (ROE) and double-digit earnings growth.
“Uniparts is currently trading at 11 times FY23 and 10 times FY25 EPS. While we acknowledge the cyclical nature of the underlying industry, we believe that the current valuation has a high margin of safety and largely factors in any downside risk,” it said.
JM Financial said the company deserves a higher valuation given its global leadership and strong competitive positioning in 3PL (cost-efficient manufacturing of multiple SKUs in small batches and scale advantage), and a likely healthy double-digit EPS growth over FY22-25 led by rising share of business with new and existing customers. It’s FY25 valuation multiple of 14 times for Uniparts is in broadly in-line with valuations of domestic OHV-focused companies.
JM Financial said the company has a strong balance sheet with net debt to equity ratio of 0.2 and net debt/Ebitda of 0.5 times for FY22.
“Capex for FY23E-25E stands at Rs 1500 crore towards expansion of steel processing capacity by 12,000 mt in phases. This is expected to support medium-term growth opportunities. Uniparts is expected to generate FCF of Rs 5,100 crore during FY23E-25E and maintain its RoE 23-24p per cent,” the brokerage said.
JM Financial said Uniparts revamped its business operations in FY19-22. Some of the restructuring initiatives undertaken included the renegotiation of customer contracts for pass-through of costs currency benefit; optimisation of manufacturing operations from US to India; and right-sizing of fixed costs
This, the brokerage said, resulted in the company’s Ebitda growing at 27 per cent CAGR and its Ebitda margin expanding from 12 per cent to a sustainable 20-21 per cent during FY19-22.
“We expect the company’s Ebitda margin to sustain at 22-23 per cent and expect PAT to grow at 15 per cent CAGR over FY22-25E,” JM Financial said.
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