Precision Camshafts Ltd

New Initiatives To Drive Success Going Ahead

20th October, 2016
Vishal Srivastav Debashish Mazumdar
Research Analyst Research Analyst
+91-22-4272 2513 +91 (22) 4088 5819
vishal.srivastav@edelweissfin.com debashish.mazumdar@edelweissfin.com
Edel Invest Research BUY
Precision Camshafts Ltd
New initiatives to drive success going ahead CMP: INR 179 Target Price INR 225

Vishal Srivastav Precision Camshaft (PCL) is one of the leading manufacturers of passenger vehicle camshafts globally with
Research Analyst dominant 70% share in the domestic market. Unwavering focus on product quality, ability to meet
+91-22-4272 2513 stringent delivery schedules and effective execution have enabled the company enhance its presence in
vishal.srivastav@edelweissfin.com some of the leading OEMs like GM, Ford, Hyundai, Toyota, among other marquee players. Moreover, it
has effectively adapted to changing requirements of OEMs, which has helped it not only bag new global
Debashish Mazumdar orders, but also effectively move up the value chain and make itself future ready. PCL’s efforts to increase
Research Analyst
the proportion of machining business from 1/3rd currently to around 50% by FY19 is estimated to add
+91 (22) 4088 5819
almost 30% to the bottom line from current level during FY16-19 period. Further, presence in the
debashish.mazumdar@edelweissfin.com
burgeoning APAC region with operations in China and India places it ideally to not only cater to the
requirements of the 2 fastest growing economies, but also reap benefits of being present in the 2 most
low-cost manufacturing destinations in the world. At CMP of INR 179, the stock is currently trading at
17.5x FY18E EPS of INR 10.2. We initiate coverage with target price of INR 225.
Bloomberg: PRECAM:IN
Strong presence in critical camshaft space lends significant competitive edge
52-week range (INR): 185 / 127 Focus on technology (product and process) has enabled PCL gain a strong foot hold in domestic (~70%
Share in issue (Cr): 9.5
share) and global (~10% share) markets. The company has scaled up the value chain from manufacturing
plain vanila raw chilled iron camshafts to machining and further to assembled camshafts. This,
M cap (INR cr): 1,700 alongwith various efficiency measures, has been key driver of significant improvement in the
company’s profitability. Focus on enhancing value-added machnining business, which entails 3x
Avg. Daily Vol. BSE/NSE
86.5 higher realisation than raw iron/ductile camshafts, has benifited PCL’s topline as well as profitability
:(‘000): over the past 2-3 years. This is amply reflected in the fact that during FY12-16, while the company’s
volume jumped ~4%, its realisation rose ~ 6% primarily driven by a favourable product mix as well as
rise in presence within OEMs with higher engine capacity models.
SHARE HOLDING PATTERN (%) Quality focus, ability to meet stringent delivery schedules: Entrenching global prowess
(in %) Sep-16 PCL is among the few camshaft suppliers who have the ability to produce all types of camshafts—
Promoter 63.92
casting, machining, hybrid/ductile and assembled. Unwavering focus on product quality, a bility to
meet quality standards along with stringent delivery schedules of OEMs & Tier-1 suppliers and effective
Public 36.08 execution have enabled the company match global standards and enhance its presence in some of
Others – the leading OEMs like GM, Ford, Hyundai, Toyota, among others. Further, various process efficiency
measures have pruned average clients’ rejection rate from ~3-4% 6-7 years ago to 1-2% 3-4 years
back to 0.5% currently—an industry benchmark.
Focus on value addition, diversifying client & geography risk: Potent profitability drivers
New product offerings and value addition in camshafts are not only aiding PCL establish its technology
130 prowess, but also boosting its profitability. The company’s efforts to increase the proportion of machining
120 business from 1/3rd currently to around 50% by FY19 is estimated to substantially boost EBITDA margin as
110
well as RoCE over the next 2-3 years. Further, its endeavour to diversify its client base as well as
100
geographies is bound to eliminate concentration risk.
90
80 Valuations
70 We remain positive on the long-term growth prospects company and its business. We foresee improvement
60 in EBITDA by 19%/19%/24% for FY17E/FY18E/FY19E respectively and recommend buy rating on the stock,
50 as we believe the current price factors in the constraints company has witnessed in FY16, and there is
40 considerable upside going ahead.
Jun-16

Jul-16
Apr-16

Sep-16
Feb-16

Mar-16

Aug-16
May-16

Year to March FY15 FY16 FY17E FY18E FY19E

Precision Sensex
Revenues (INR Cr) 514 438 484 548 646
Rev growth (%) 12% -15% 10% 13% 18%
EBITDA (INR Cr) 138 118 140 168 208
PAT (INR Cr) 46 64 84 97 120
EPS (INR) 5.7 6.7 8.8 10.2 12.6
EPS growth (%) NA 19% 31% 16% 24%
P/E (x) 31.7 26.5 20.3 17.5 14.2

th
RoACE (%) 28% 23% 26% 25% 28%
Date: 20 October, 2016 RoAE (%) 23% 14% 14% 14% 15%

1 Edel Invest Research

 Precision Camshafts Ltd

Precision Camshaft Ltd (PCL) is expected to growth at a CAGR of 12%/19% in Revenues/EBITDA respectively during FY16-18
period. Higher growth in margins can be attributed by continuous shift in product mix towards more value added machined and
assembled camshafts, as the incremental order book significantly comprises of these value added products.

1) Focus on diversifying client 1) Focus on gaining 1) Realisation to improve on

base and gaining market incremental business from the back of favourable
share in PV camshaft value added products like product mix
markets by grabbing orders machining and assembled
from OEMs where company camshaft 2) Significant rise in EBITDA
has limited presence. margins and ROCE
2) Focus on gaining presence
2) Increase presence in in higher end luxury and
existing client base sports cars

FY15 FY16 FY17E FY18E FY19E FY15 FY16 FY17E FY18E FY19E PE multiple EPS Price target

Revenue 514 438 484 548 646 ROACE 28% 23% 26% 25% 28% 20x 10.2 204
Debt
EBITDA 138 118 140 168 208 0.97 0.40 0.25 0.17 0.11 22x 10.2 225
Equity
EBITDA margins 26% 28% 29% 31% 33%

PAT 46 64 84 97 120

EPS CAGR of
Entry = INR
23% exit
179 @ 17.5x
multiple of 22x
FY18E
FY18E

Total return of 25%

2 Edel Invest Research

 Precision Camshafts Ltd

Focus Charts
Sharpened Focus On Global Business Has Enhanced PCL’s Global …Reflected In Robust Jump In Market Share
Presence…
514
438 Production disruption at GM
459
Uzbekistan and GM North
America operations impacted 9.9%
357 both topline and market share
INR (cr)

303 in FY16

79% 77% 9.0%

77% 8.8%
69% 70%
8.5% 8.4%

31% 30% 23% 21% 23%

FY12 FY13 FY14 FY15 FY16 CY11 CY12 CY13 CY14 CY15
Domestic Sales Export Sales

Camshafts: Evolution of outsourcing process by global OEMs

Prior to 1990 1990 - 2005 Post 2005

Camshaft OEMs started procuring raw Increasing number of OEMs

manufacturing was camshafts, while machining was started outsourcing full
inhouse process for done inhouse requirement (casting & machining)
OEMs

Newly developed assembled camshafts render PCL future Higher Growth in Machined Business Indicates Sharpened
ready Focus…
12.0
Raw camshaft CAGR FY12-16: 4%
10.0 Machined CAGR FY12-16 : 8%
Units (in mn)

New product
Assembeled 8.0
camshaft
Machined
camshaft 6.0

Assembled camshaft: 4.0

Raw iron/ductile Machining: Cutting, Assembled by robotics: FY12 FY13 FY14 FY15 FY16
drilling, finishing, Fully mechanized process
camshaft Raw iron cast/ ductile camshaft Machined camshaft
reaming, milling, etc Different materials can be used.
of the raw camshafts These are 30% lighter than normal.
Healthy Rise In Realisation Will Fuelled Significant Growth in
Iron cast camshaft:
Casting process
Price p.u.: INR 1200/pc Price p.u.: INR 1300-1500/pc EBITDA Margins...
27% 27%
Material used: Pig iron, Improvement in margins (FY12-FY14)
resin coated sand Gradual change in product mix towards
machining, as well as change in engine Key reasons for rise in
mix (higher capacity engines) margins in FY15
1 Significant improvement
Ductile camshaft: in yield (as rejection rates
Casting process 17% improved substantially)
Material used: Pig iron, 2. Drop in prices of Resin
CRCA, Low Boron Scrap, coated sand that was not
16% passed on
RCS and filter 14%
3. Sharp drop in employee
cost due to onetime ESOPS
Price p.u.: INR 400/pc incurred in FY14

FY12 FY13 FY14 FY15 FY16

3 Edel Invest Research

 Precision Camshafts Ltd

Disruption in GM Europe operations impacted FY16 revenue … ... Improvement in performance at sequential basis indicates revival in
GM dispatches
180 Quarterly results Q1FY16 % NS Q1FY17 % NS Q4FY16 % NS
169
157 Net Sales 115.7 100% 115.1 100% 106 100%
Total Income 124.2 107% 125.3 109% 107.4 101%
Operating
119 Expenditure 85.9 74% 83.7 73% 79.5 75%
INR (in cr)

PBIDT 38.3 33% 41.6 36% 27.9 26%

Interest 2.1 2% 2.3 2% 2.3 2%
PBDT 36.2 31% 39.3 34% 25.6 24%
Depreciation 9.9 9% 9.3 8% 9.3 9%
PBT 26.3 23% 29.9 26% 16.3 15%
Tax 9.3 8% 11.5 10% 6.8 6%
Reported PAT 17.1 15% 18.5 16% 9.5 9%
FY13 FY14 FY15 FY16

Sharpening focus on machining business … … will significantly boost EBITDA margin

3.0 32% 35% 40%
Proportion of machining would observe 32%
sharp rise due to incremental order from 30% 35% 31%
2.5 Ford Dragon, a new project from Ford and 31%
few new project,s from GM and Toyota 25% 29%
19% 30% 27% 27%
2.0 18% 20%
Units (in mn)

14% 25%
Improvement in margins (FY16-FY19)
15%
Increase in proportion of machining and
1.5 20% 16% 17% assembled camshaft
10% 14%
1.0 5% 15%

0% 10%
0.5
-2% -5% 5%
-4%
0.0 -10% 0%
FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F
Machined camshaft supply (LHS) Y-o-Y growth (RHS)

Favourable product mix will provide considerable upside to RoCE PCL: In the top quadrant among major industry players
35%
MSSL
Avg ROCE: 16%
30% Revenue growth: 36%
28% 28% Overseas % to sales: 80% SEL
Avg ROCE (FY12-FY16)

25% Avg ROCE: 19%

26% Revenue growth: 30%
25% Overseas % to sales: 17%
20% PCL
23% Avg ROCE: 21%
Revenue growth: 12%
15% Overseas % to sales: 79%
Key reasons for softening of ROCE in FY16-FY18
19% 19% 1)Significant capex towards setting up and 10%
BFL Endurance Tech
17% scaling machning capacity of 2mn units for Ford
Avg ROCE: 22%
Avg ROCE: 13%
16% Dragon and one more new project, along with
5% Revenue growth: 8% Revenue growth: 8%
new GM orders
Overseas % to sales: 65% Overseas % to sales: 30%
2)Setting and scaling machining unit in Brazil
0%
10% 15% 20% 25% 30% 35%
FY11 FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F Revenue growth CAGR FY12-FY16

Source: Edel Invest Research

4 Edel Invest Research

 Precision Camshafts Ltd

1) Strong presence in critical camshaft space lends significant competitive edge to Precision
Camshaft Ltd (PCL)
PCL has, over the previous decade, emerged as a major passenger vehicle (PV) camshaft supplier not only in
domestic, but global markets as well.

Camshaft manufacturing, being a critical engine component, entails significant focus on technology
knowhow, precision and quality standards. By virtue of its unwavering focus on enhancing technology
(product and process), PCL has attained leadership in the domestic market (more than 70% market share)
and has also emerged a strong global player (~10% market share).

Sharpened Focus On Global Business Has Enhanced PCL’s Global …Reflected In Robust Jump In Market Share
Presence…
514
438 Production disruption at GM
459
Uzbekistan and GM North
America operations impacted 9.9%
357 both topline and market share
INR (cr)

303 in FY16

79% 77% 9.0%

77% 8.8%
69% 70%
8.5% 8.4%

31% 30% 23% 21% 23%

FY12 FY13 FY14 FY15 FY16 CY11 CY12 CY13 CY14 CY15
Domestic Sales Export Sales
Source: Edel Invest Research and Company sources

Camshaft being one among “5Cs” technology obsolesce and substitution risk is minimal
Current Business Camshaft is among the 5 critical components in an internal combustion engine. Further, in camshafts the
segment of PCL technology complexity is comparatively higher than in the other 4 components, as its design determines an
engine’s power, efficiency, fuel economy and emission.

5Cs of engine components

Raw iron Machining • Camshafts
cast/ductile camshafts
• Crankshafts
camshaft
• Connecting rod
• Cylinder head
• Cylinder block
Semi Fully
finished processed Camshaft design varies with engine design. Further, with incremental refinement in engine technology,
product product
camshaft design has also seen significant changes.

OEMs and Tier 1 suppliers Wide product portfolio lends winner’s edge; presence in burgeoning APAC market burnishes prospects
(PCL caters only to PV PCL is among the few camshaft suppliers who have the ability to produce all types of camshafts (casting,
segments) machining, hybrid/ductile and assembled). Unwavering focus on product quality and effective execution
have enabled the company match global standards and enhance its presence in some of the leading OEMs
PCL suppliers both semi finished
like GM, Ford, Hyundai, Toyota, among other marquee players, during the past few years.
camshafts and fully processed
camshafts to different
customers as per their
requirements

5 Edel Invest Research


Camshaft manufacturing process
(Iron cast and Ductile camshafts)
1. Foundry/Casting process
2. Machining process
Both conventional iron cast and
ductile camshafts have to go
through both casting and
machining process before
installation in the engine
6 Edel Invest Research
Precision Camshafts Ltd
Evolution of engine technologies has triggered significant changes in camshaft technology
Evolving Engine Technology
VVT
DOHC
SOHC
OHV
Increasing Efficiency & Performance
Source: Company reports
Extended client acquisition process and significant capex: Formidable moat
Camshaft design varies across different car models. To bag a supply order for a new model, the camshaft
manufacturer has to undergo an elaborate and extended approval process (~2-3 years). Hence, significant
investment is involved in R&D, designing and testing process, a formidible entry barrier for a new entrant.
Gantt chart for client acquisition process
Number of Days Development Period of 2-3 years
RFQ Release
Feasibility & Offer from Supplier 30
Technical Review & Open Issue Closure 30
Negotiations & Program Award along with Purchase Order 60
Preliminary Part (PP) Samples Receipt from Supplier 150
Validation of PP Samples by OEM 150
Validated Part (VP) Samples Receipt from Supplier 180
Engine Validation of VP Samples by OEM 180
PPAP (Production Part Approval Process) Parts
120
Manufacturing using Production Line
PPAP Parts Approval by OEM 60
Serial Production Start 200
Source: Company reports and Edel Invest Research
Globally, there are only a handful camshaft manufacturers (around 5). The number of players has decresed
from around 10-11 during the past one to one and half decades.
Major camshaft manufacturers globally:
 MAHLE
 ThyssenKrupp
 Linamar
 Riken
 Precision Camshafts
Rising outsourcing by global OEMs: Robust growth opportunity for PCL
Since camshaft is a critical component, most OEMs had in-house manufacturing facilities. However, focus on
cost competitiveness and efficiency improvement has led to considerable rise in the product’s outsourcing—
humungous growth opportunity for PCL.
 Precision Camshafts Ltd

Camshafts: Evolution of outsourcing process by global OEMs

Prior to 1990 1990 - 2005 Post 2005

Camshaft OEMs started procuring raw Increasing number of OEMs

manufacturing was camshafts, while machining was started outsourcing full
inhouse process for done inhouse requirement (casting & machining)
OEMs

Source: Edel Invest Research

Chilled iron camshaft Moving up value chain and process effeciency measures: Key growth drivers …
PCL has moved up the value chain from manufacturing plain vanila raw chilled iron camshafts to machining
and further to assembled camshafts. This, alongwith with various efficiency measures, has been key driver of
significant improvement in the company’s profitability over the past 2-3 years.

Newly developed assembled camshafts render PCL future ready

Ductile camshaft

New product
Assembeled
camshaft
Machined
camshaft Assembled camshaft:
Assembled camshaft Machining: Cutting, Assembled by robotics:
drilling, finishing, Fully mechanized process
Raw
reaming, milling, etc Different materials can be used.
iron/ductile
of the raw camshafts These are 30% lighter than normal.
camshaft
Iron cast camshaft:
Price p.u.: INR 1200/pc Price p.u.: INR 1300-1500/pc
Casting process
“Don’t climb a mountain with an Material used: Pig iron,
resin coated sand
intention that the world should
see you, climb it with the
intention to see the world…” Ductile camshaft:
General Motors Casting process
Material used: Pig iron,
CRCA, Low Boron Scrap,
RCS and filter

Price p.u.: INR 400/pc

Source: Edel Invest Research

…benefiting topline growth and margin performance

Focus on enhancing value-added machnining business, which entails 3x higher realisation than raw
iron/ductile camshafts, has benifited PCL’s topline as well as profitability over the past 2-3 years.

This is amply reflected in the fact that during FY12-16, while the company’s volume jumped ~4% (mirroring
industry growth), its realisation rose ~ 6% primarily driven by higher growth in machining business, rise in
exports as well as increase in the presence within OEMs towards higher engine capacity models.

Further, various process efficiency measures have pruned average clients’ rejection rate from ~3-4% 6-7
years ago to 1-2% 3-4 years back to 0.5% currently—an industry benchmark.

7 Edel Invest Research

 Precision Camshafts Ltd

Higher Growth in Machined Business Indicates Sharpened Focus… …Which Has Percolated To Healthy Rise in Realisation
Production disruption at GM Uzbekistan and
11.0 GM North America operations impacted both 550
topline and market share in FY16
10.0 500
Raw camshaft CAGR FY12-16: 4%
9.0 Machined CAGR FY12-16 : 8% 450

INR per unit

Units (in mn)

8.0
400
7.0
350
6.0
300
5.0
250
4.0
FY12 FY13 FY14 FY15 FY16 200
Raw iron cast/ ductile camshaft Machined camshaft FY12 FY13 FY14 FY15 FY16
Source: Edel Invest Research and Company sources

Healthy Rise In Realisation Will Fuelled Significant Growth in EBITDA …And Thereby Benefited ROCE
Margins...

Key reasons for softening of ROCE in FY16

Improvement in margins (FY12-FY14) 1. Significant capex towards setting up
27% 27% machning capacity of 2mn units machining
Gradual change in product mix towards
machining, as well as change in engine capacity
mix (higher capacity engines) 2. Sharp drop in profitability 28%

Key reasons for rise in 23%

margins in FY15
17% 1 Significant improvement in
yield (as rejection rates
improved substantially) 19% 19%
16%
2. Drop in prices of Resin
14% coated sand that was not 17%
passed on 16%
3. Sharp drop in employee
cost due to onetime ESOPS
incurred in FY14

FY12 FY13 FY14 FY15 FY16 FY11 FY12 FY13 FY14 FY15 FY16

Source: Edel Invest Research and Company sources

Favourable product mix, efficiency has aided healthy profitability and return ratios
Over the past few years all major domesitc auto component companies have been focusing on process
improvement, value-added products and efficiency enhancement apart from expanding their global
presence.

However, very few companies operating on the global stage have been successful in maintaining consistent
healthy topline growth and improvement in profitability. PCL is in the top quadrant among the few leading
domestic auto component companies.

8 Edel Invest Research

 Precision Camshafts Ltd

PCL: In the top quadrant among major industry players

35%
MSSL
30% Avg ROCE: 16%
Revenue growth: 36%
SEL

Avg ROCE (FY12-FY16)

25% Overseas % to sales: 80%
Avg ROCE: 19%
Revenue growth: 30%
20% PCL
Overseas % to sales: 17%
Avg ROCE: 21%
Revenue growth: 12%
15%
Overseas % to sales: 79%
10% BFL Endurance Tech
Avg ROCE: 13% Avg ROCE: 22%
5% Revenue growth: 8% Revenue growth: 8%
Overseas % to sales: 65% Overseas % to sales: 30%
0%
10% 15% 20% 25% 30% 35%
Revenue growth CAGR FY12-FY16
Note: MSSL: Motherson Sumi Systems Ltd, BFL: Bharat Forge Ltd, SEL: Suprajit Engineering LTd
Size of the buble denotes exports proportion to overall revenues
Source: Edel Invest Research and Company sources

High customer concentration risk affected PCL’s performance in FY16

“Failure is an opportunity to However, GM and Ford contribute more than 60% to the company’s topline, leading to high concentration
begin again only this time more risk. It bore the brunt in FY16, when production disruption at GM’s Uzbekistan and one of GM’s North
wisely” American operation dented PCL’s revenue by ~11%.
Henry Ford

Disruption in GM’s Europe business significantly dented PCL’s FY16 revenue

180 1) Decrease in production at Uzbekistan plant

169 due to ban on GM cars in Russia
157 2) Shifting of GM North America plant to
Europe
INR (in cr)

119

FY13 FY14 FY15 FY16

Source: Edel Invest Research and Company sources

Concerns in GM’s Europe operations:

a. Temporary production disruption due to shifting of one of the GM’s North America production base to
Europe.
b. Production suspension in GM’s Uzbekistan plant which caters to the Russian market, after the Russian
government imposed a ban on sale of American branded products in the country.

However, these concerns are expected to wane in FY17 as significant proportion of dispatches are expected
to revive by Q3FY17.

9 Edel Invest Research

 Precision Camshafts Ltd

PCL’s operation in China through JVs Strong presence in growing Asian markets and India operations enhance prospects
Joint venture
Business
% Start of The APAC region is anticipated to spearhead automotive demand in the near to medium term. With
companies Holding operation
Ningbo presence in China (through foundry and machining facility via JV and trading subsidiary) and India, PCL is well
Shenglong PCL Machining 22.5% FY14 placed to not only cater to the requirements of the 2 fastest growing economies, but also reap benefits of
Camshafts
PCL Shenglong being present in the 2 most low-cost manufacturing destinations in the world.
(Huzhou)
Foundry 40.0% FY17
Specialised
Casting Co PCL well placed to cash in on growth opportunities in burgeoning APAC markets
120 CAGR (CY14-18)

100 14.1 14.3

14.5 14.1 14.1 0.3%

80 30.1 30.0
Units (in mn)

30.3 30.2
30.6 0.2%
60

40
58.4 60.6 62.7 64.9 4.2%
56.6
20

0
CY14 CY15 CY16F CY17F CY18F
APAC EMEA Americas
Source: Edel Invest Research

Production loss post foundry unit in China off set by increasing supplies to MSIL, Toyota and Hyundai
PCL‘s foundry in China is scheduled to be operational from start of FY17, which will entail production loss of
nearly 1mn units of raw iron camshafts on yearly basis. However, the company has been able to off set this
loss, to some extent, by incremental orders it bagged from MSIL, Toyota and Hyundai.

Dip in volumes from foundry to be compensated by new orders

Units (in mn)

0.50
1.16 1.18
1.00

0.45

FY15 FY16 FY17F FY18F

Castings supplied to China Machine Shop Incremental new orders
Source: Edel Invest Research

10 Edel Invest Research

 Precision Camshafts Ltd

2) Quality focus, ability to meet stringent delivery schedules: Entrenching global presence
During the previous decade, a large number of domestic auto component suppliers have started expanding
their footprint in key global markets to de-risk from the uncertainties in domestic business. Hence, India’s
components exports have clocked a robust 20% CAGR over FY06-16.

Despite Sluggish Growth in Vehicle Demand… ...India’s Auto Component Exports Have Catapulted in Past 10 Years

88 90 709
86 685
82
78 615
75
Units (in mn)

INR (in 000 cr)

72
66 68 68 66 527

427

303

168 189
132 141
112
CY05

CY06

CY07

CY08

CY09

CY10

CY11

CY12

CY13

CY14

CY15

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16
Source: OICA Source: ACMA

Meeting customer needs and cost competitive advantage fuelled healthy rise in component exports
Ability to meet quality standards
Ability to meet quality standards along with stringent delivery schedules of OEMs and Tier-1 suppliers have
& stringent delivery schedules
enabled domestic auto component manufacturers effectively expand their foot print in the global market
during the previous decade.

Quality Focus Enabled Domestic Players Win Global Accolades … ...Indian Suppliers Highest Deming Award Winners Outside Japan
Shingo silver
ISO9001 651 2
medallion

JIPM 3
TS16949 546

Japan Quality 5
ISO14001 287
Deming 14

OHSAS 162
TPM 15

Numbers Numbers
Source: ACMA Source: ACMA

Inherent cost advantage compared to other major manufacturing destinations across the world has made
Cost competitiveness over key
India the preferred sourcing destination for OEMs and major Tier-1 suppliers.
global manufacturing hubs

11 Edel Invest Research

 Precision Camshafts Ltd

Comparative Cost Advantage Table Across Key Manufacturing Destination Globally (BCG Global
Manufacturing Cost-Competitiveness Index 2014)
India has significant labour cost
advantage over all key manufacturing
hubs except Indonesia
160

Avg manufacturing cost index 2014 (India=100)

140
120
100
80
60
40
20
0

Canada
France
Italy

India

Spain

Thailand
UK
Germany

Belgium

Taiwan
China

USA
Japan

Poland
Sweden
Austria
Netherlands

Russia
Mexico

Indonesia
S Korea

Switzerland
Australia

Brazil

Czech Republic
Others Natural gas Electricity Labour

Source: Edel Invest Research and BCG

"Be ready to revise any system,
scrap any method, abandon any
theory, if the success of the job
requires it."
Henry Ford
PCL among few players that have been able to make a mark on global stage …
PCL commenced operation in 1992 and within a decade the company became the market leader in the
domestic PV camshaft market on account of its ability to match quality standards at competitive prices.
In 2002, PCL received its first export order from GM Europe and subsequently expanded its presence with
other global OEMs like Ford, Mercedes, Porsche, Hyundai and Toyota.

… focus on upgrading product technology to suit customers’ changing needs lends competitive edge
PCL has been able to effectively adapt to the changing requirements of OEMs (from raw camshaft to
machined and further to assembled camshafts) by incurring significant investments in technology during the
past 3-4 years.

This has helped it to not only bag new orders from the global OEMs, but also enabled the company to
effectively move up the value chain and make itself future ready.

Going forward, sharpening focus on enhancing the machining camshafts business will lead to significant
margin gains.

Key new orders for machine camshaft supplies:

 Ford Dragon project
 Ford new project
 GM new project
 Toyota’s incremental orders

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 Precision Camshafts Ltd

Endevour to gain new orders for machined camshafts will take PCL’s profitability to next level
Existing supplies Expected future supplies
OEMs Casting Machined Casting Machined
camshafts camshafts camshafts camshafts
General Motors √ √ √
Ford √ √ √
Hyundai √ √ √
Toyota Motor √ √
Mercedes Benz √ √
Maruti Suzuki √ √
M&M √ √
SsangYong √ √
Tata Motors √ √
Porsche √ √
Fiat √ √
Source: Company and Edel Invest Research

In addition to above orders, PCL is also at an advance stage of negotiation with other global OEMs in
machining space.

3) Focus on value addition, diversifying client & geography base: Potent profitability drivers
PCL is prudently getting future ready by introducing new products and also via value addition in existing
products. This will not only help to establish technology prowess, but also enhance its PCL’s profitability:

 Recently, the company acquired the capability to manufacture assembled camshafts used in sports and
luxury cars, which entails 6x higher realisation than raw iron cast camshaft. These camshafts are
manufactured through patent robotics technologies from EMAG.

 PCL is shifting focus to machining business, which yeilds atleast 3x higher realisation than plain vanila
raw iron cast camshafts.

 On the anvil are plans to manufacture large sized camshafts for stationary machines.

Change in product mix to enhance EBITDA margin as well as RoCE

rd
PCL’s efforts to increase the proportion of machining business from 1/3 currently to around 50% by FY19 is
estimated to substantially boost its EBITDA margin as well as RoCE over the next 2-3 years. Further, focus on
increasing presence in the higher engine capacity luxury and sports car segment will signifcantly enhance
profitability.

Sharpening Focus On Machining Business … … Will Significantly Boost EBITDA Margin

3.0 60%
Proportion of machining would
52%
Improvement in margins 32%
observe sharp rise due to incremental (FY12-FY14)
31%
2.5 order from Ford Dragon, Few new 43% 50% Gradual change in product
project, GM new project and Toyota mix towards machining, as 27% 29%
well as change in engine mix
27%
2.0 36% 34% 35% 40% (higher capacity engines)
33%
Units (in mn)

Improvement in margins (FY16-FY19)

28% Increase in proportion of machining
1.5 30% and assembled camshaft
16% 17%
14%
Key reasons for rise in margins in FY15
1.0 20% 1 Significant improvement in yield (as
rejection rates improved substantially)
2. Drop in prices of Resin coated sand that
0.5 10% was not passed on
3. Sharp drop in employee cost due to
onetime ESOPS incurred in FY14
0.0 0%
FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F
Machined camshaft supply (LHS) % Share in revenues
Source: Company and Edel Invest Research

13 Edel Invest Research

 Precision Camshafts Ltd

…Subsequently Providing Considerable Upside To PCL’s RoCE

28%
28%
26%
25%
23%

19% 19% Key reasons for softening of ROCE in FY16-FY18

17% 1)Significant capex towards setting up and scaling
machning capacity of 2mn units for Ford Dragon and
16% one more new project, along with new GM orders
2)Setting and scaling machining unit in Brazil

FY11 FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F

Source: Company and Edel Invest Research

Machining business lends technology edge and cushion from volatility in input prices
As machining capability entails significant investments, fixed asset turnover of this business is nearly half that
of iron cast camshaft. However, moving to machining camshafts will not only enhance PCL’s product
offerings, but also raises substantial entry barrier.

Comparison of cost structure and profitability per unit basis for casting and machining camshafts
INR Casting % Sales Machining % Sales
Sales 400 100% 1200 100%
EBITDA 80 20% 480 40%
EBIT 44 11% 372 31%
Interest 8 2% 24 2%
PBT 36 9% 348 29%
Tax 12 3% 115 10%
PAT 24 6% 233 19%
Capex per unit 200 1200
FA turnover (times) 2.0 1.0
ROCE 22% 31%
Source: Company and Edel Invest Research

Impact on topline due to production disruption at GM Europe operations an aberration

PCL bore the brunt of high customer concentration risk in FY16, when its topline was substantially impacted
by production disruption at GM’s Europe operations. A significant proportion of orders are expected to
revive by FY17 as:

• Shifting to Europe for GM’s one of the North American unit is expected to be completed this fiscal.
• GM’s local partner in Uzbekistan has started exporting cars to Russia under its brand instead of GM,
which may lead to significant restoration of PCL’s despatches from Q3FY17.

14 Edel Invest Research

 Precision Camshafts Ltd

Disruption in GM Europe operations impacted GM business... …consequently, leading to sharp drop in PCL’s topline in FY16
180 514
169
157 459 438
INR (in cr)

119 357

INR (in cr)

FY13 FY14 FY15 FY16 FY13 FY14 FY15 FY16
Source: Company and Edel Invest Research

Revival of supply to GM Europe is reflected in the QoQ revenue improvement in Q1FY17. Further, PCL’s FY17
revenue is estimated to get a boost from GM’s new order.

Improvement in performance at sequential basis indicates revival in GM dispatches

Quarterly results Q1FY16 % NS Q1FY17 % NS Q4FY16 % NS

Net Sales 115.7 100% 115.1 100% 106.0 100%

Total Income 124.2 107% 125.3 109% 107.4 101%
Total operating Expenditure 85.9 74% 83.7 73% 79.5 75%
PBIDT 38.3 33% 41.6 36% 27.9 26%
Interest 2.1 2% 2.3 2% 2.3 2%
PBDT 36.2 31% 39.3 34% 25.6 24%
Depreciation 9.9 9% 9.3 8% 9.3 9%
PBT 26.3 23% 29.9 26% 16.3 15%
Tax 9.3 8% 11.5 10% 6.8 6%
Reported Profit After Tax 17.1 15% 18.5 16% 9.5 9%
Source: Edel Invest Research and Company sources

Diversifying client base as well as markets to dilute concentration risk

PCL is in advanced stage of discussions for new orders with some of the leading OEMs like VW, Mercedes,
Toyota, Hyundai, BMW, among otehers, which is bound to lead to significant diversification going forward.

Currently, the company caters to around 170 programmes (car models), which is expected to jump ~40%
over the next 2-3 years as these programmes are at advanced levels of approval process. These incremental
orders are across different OEMs and geographies, which will significantly dilute the company’s conentration
risk.

Healthy financial position combined with strong market presence provides significant value accretion
Presence in domestic and global markets and wide product offerings cushion PCL from geographical and
industry volatility. Further, with aggressive plans to diversify clientele will help the company avoid the high
customer concentration induced adverse topline impact it faced in FY16.

Presence in a capital intensive industry & competitive market and ability to gradually enhance profitability
place PCL in an ideal position to make significant value accretion, akin to a few other efficient domestic auto
component manufacturers.

15 Edel Invest Research

 Precision Camshafts Ltd

Profitability comparison among key autocomponent players

FY16 FY17F FY18F FY19F
Net sales (INR cr)
Precision Camshafts 438 484 548 646
Suprajit Engineering 952 1169 1378 n.a.
Motherson Sumi 38395 44520 50355 57807
Bharat Forge 7646 8081 9308 NA
EBITDA margins
Precision Camshafts 27% 29% 31% 32%
Suprajit Engineering 16% 16% 17% n.a.
Motherson Sumi 9% 10% 11% 13%
Bharat Forge 19% 19% 19% NA
PAT margins
Precision Camshafts 15% 17% 18% 19%
Suprajit Engineering 8% 9% 10% n.a.
Motherson Sumi 3% 4% 4% 5%
Bharat Forge 9% 9% 11% NA
ROCE
Precision Camshafts 22% 26% 25% 27%
Suprajit Engineering 26% 24% 27% NA
Motherson Sumi 26% 27% 31% 38%
Bharat Forge 19% 19% 22% NA
Debt-Equity (times)
Precision Camshafts 0.33 0.25 0.17 0.11
Suprajit Engineering 0.50 0.30 0.20 NA
Motherson Sumi 1.00 0.80 0.50 0.30
Bharat Forge 0.70 0.60 0.40 NA
PE (times)
Precision Camshafts 26.5 20.3 17.6 14.2
Suprajit Engineering 29.7 26.6 20.7 NA
Motherson Sumi 32.5 27.4 20.8 15.4
Bharat Forge 31.4 28.5 21.1 NA
Source: Edel Invest Research

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 Precision Camshafts Ltd

Key management
Name Designation Profile
Mr Yatin Shah holds a B.Com from Bombay University and a
Chairman and MBA from Pune University. Over 23 years of experience in the
Mr. Yatin Shah Managing auto component manufacturing sector. Received various
Director awards, including J.R.D. Tata Udyog Ratna Award by
Maharashtra Audyogik Vikas Parishad, Pune in 2011.
Dr Suhasini Shah holds Bachelor’s degree in law, in medicine
and in surgery from Shivaji University. She has a PGDM in
medico-legal systems, Symbiosis Centre of Health Care and has
Dr. Suhasini Shah Director
participated in an executive education programme on small
and medium enterprises at IIM, Ahmedabad. Over 23 years of
work experience in management.
Mr Joshi holds a BCom from Bangalore University and a
Mr. Ravindra Diploma in Business Management from Shivaji University. He
Director & CFO
Rangnath Joshi has 28 years of experience in the field of finance with various
organizations.
Mr Aradhye holds a Bachelor’s degree in metallurgic
Mr. Jayant Non-Executive engineering from the University of Pune and a Bachelor’s
Aradhye Director degree in mechanical engineering from Marathwada
University.
He holds a Bachelor’s degree in law and a Bachelor’s degree in
Independent commerce from the University of Pune. He is a certified
Mr. Sarvesh Joshi
Director member of the Institute of Chartered Accountants of India and
has been a practicing Chartered Accountant for over 27 years.
He holds a Bachelor’s degree in commerce and is a fellow of
Mr. Pramod Independent the ICSI. He holds a certificate of merit from the Institute of
Mehendale Director Cost and Work Accountants of India. He is the founder and a
former director of Link Intime India Private Limited.
He holds a Bachelor’s degree in commerce from Nagpur
Independent University, a bachelor’s degree in law from the University of
Mr. Vedant Pujari
Director Pune and a diploma in corporate laws from Indian Law Society
Pune. He is a member of the Delhi High Court Bar Association
He holds a Bachelor’s degree in electronics engineering from
Mr. Vaibhav Independent
Dnyaneshwar Vidyapeeth and has been certified by the ISACA,
Mahajani Director
Pune as an Information Security Manager.

Key Risks
 High customer concentration risk
 Risk due to volatility in global passenger car market
 Disruption due to rising demand for electric vehicles
 Increase in competition, with the entry of new entrant
 Currency risk

17 Edel Invest Research

 Precision Camshafts Ltd

Financials Income Statement (INR Cr) FY15 FY16 FY17F FY18F FY19F
Income from opera tions 514 438 484 548 646
Di rect cos ts 167 131 136 150 175
Empl oyee cos ts 65 56 59 65 72
Other expens es 144 133 148 166 191
Total opera ting expens es 376 321 344 380 438
EBITDA 138 118 140 168 208
Depreci a tion a nd a mortis a tion 39 39 38 50 58
EBIT 99 79 102 118 150
Interes t expens es 11 9 7 5 3
Other i ncome 11 17 16 16 14
Profi t before tax 99 86 111 129 161
Provi s i on for tax 35 32 38 44 55
Core profi t 63 55 73 85 106
Extra ordi na ry i tems 16 0 0 0 0
Profi t a fter tax 48 55 73 85 106
Sha re from a s s oci a tes -1 9 11 12 14
Adjus ted net profi t 46 64 84 97 120
Equi ty s ha res outs tandi ng (mn) 8.2 9.5 9.5 9.5 9.5
EPS (INR) ba s i c 5.7 6.7 8.8 10.2 12.6
Di l uted s ha res (Cr) 8.2 9.5 9.5 9.5 9.5
EPS (INR) ful l y di l uted 5.7 6.7 8.8 10.2 12.6

Growth metrics (%) FY15 FY16 FY17F FY18F FY19F

Revenues 11.9 -14.8 10.4 13.3 17.8
EBITDA 76.2 -14.8 19.4 19.4 24.1
PBT 92.0 -12.3 28.1 16.4 24.6
Net profi t 55.2 38.3 30.8 15.6 23.7
EPS NA 19.3 30.8 15.6 23.7

Common size metrics- as % of net revenues FY15 FY16 FY17F FY18F FY19F
Opera ting expens es 73.2 73.2 71.0 69.4 67.8
Depreci a tion 7.6 8.9 7.9 9.1 9.0
Interes t expendi ture 2.1 2.1 1.4 0.9 0.5
EBITDA ma rgi ns 26.8 26.8 29.0 30.6 32.2
Net profi t ma rgi ns 9.0 14.6 17.3 17.7 18.6

18 Edel Invest Research

 Precision Camshafts Ltd

Balance Sheet (INR Cr) FY15 FY16 FY17F FY18F FY19F

Equi ty s ha re ca pi tal 82 95 95 95 95
Res erves & s urpl us 150 409 482 567 673
Sha rehol ders funds 232 503 577 662 768
Secured l oa ns 99 69 56 17 13
Uns ecured l oa ns 85 97 90 95 71
Borrowi ngs 184 166 146 113 84
Net Deferred tax 11 7 7 7 7
Sources of funds 427 676 729 781 858
Gros s bl ock 332 357 457 578 674
Depreci a tion 129 166 205 255 313
Net bl ock 204 191 252 324 361
Ca pi tal work i n progres s 16 23 23 23 23
Total fi xed a s s ets 220 213 275 346 384
Inves tments 66 72 72 72 72
Inventori es 38 39 37 41 48
Sundry debtors 105 92 103 116 138
Ca s h a nd equi va l ents 90 316 290 262 283
Loa ns a nd a dva nces 27 33 34 30 30
Other current a s s ets 7 8 5 6 6
Total current a s s ets 266 488 470 456 506
Sundry credi tors a nd others 106 83 77 83 93
Provi s i ons 18 11 11 11 11
Total CL & provi s i ons 124 94 88 93 104
Net current a s s ets 142 391 382 363 403
Net Deferred tax 11 7 7 7 7
Uses of funds 427 676 729 781 858

19 Edel Invest Research

 Precision Camshafts Ltd

Ratios FY15 FY16 FY17F FY18F FY19F

ROAE (%) 22.8 14.5 13.5 13.7 14.8
ROACE (%) 28.5 23.0 25.9 24.9 27.7
Debtors (da ys ) 80 85 80 80 80
Current ra tio 2.1 5.0 5.1 4.7 4.7
Debt/Equi ty 0.8 0.3 0.3 0.2 0.1
Inventory (da ys ) 86 107 100 100 100
Pa ya bl e (da ys ) 136 178 150 150 150
Ca s h convers i on cycl e (da ys ) 30 14 30 30 30
Debt/EBITDA 1.4 1.5 1.1 0.8 0.5
Adjus ted debt/Equi ty 0.4 (0.3) (0.2) (0.2) (0.3)

Valuation parameters FY15 FY16 FY17F FY18F FY19F

Di l uted EPS (INR) 5.7 6.7 8.8 10.2 12.6
Y-o-Y growth (%) NA 19% 31% 16% 24%
CEPS (INR) 10.4 10.9 12.9 15.4 18.8
Di l uted P/E (x) 31.7 26.5 20.3 17.5 14.2
Pri ce/BV(x) 7.3 3.4 2.9 2.6 2.2
EV/Sa l es (x) 3.5 3.5 3.2 2.8 2.3
EV/EBITDA (x) 13.0 13.2 11.1 9.3 7.2
Di l uted s ha res O/S 8.2 9.5 9.5 9.5 9.5
Ba s i c EPS 5.7 6.7 8.8 10.2 12.6
Ba s i c PE (x) 31.7 26.5 20.3 17.5 14.2

20 Edel Invest Research

Auto

Edelweiss Broking Limited, 1st Floor, Tower 3, Wing B, Kohinoor City Mall, Kohinoor City, Kirol Road, Kurla(W)
Board: (91-22) 4272 2200

Vinay Khattar
Head Research
vinay.khattar@edelweissfin.com

Rating Expected to
Buy appreciate more than 15% over a 12-month period
Hold appreciate between 5-15% over a 12-month period
Reduce Return below 5% over a 12-month period

130 Precision Camshafts Price Chart

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21 Edel Invest Research

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22 Edel Invest Research