Sansera IPO: A detailed fundamental analysis

Sansera Engineering Limited IPO opens for subscription on 14th September. The company is looking to raise Rs 1283 crore through the public issue. Here are the details:

About the IPO

Sansera Engineering IPO Date: 14 September - 16 September 2021

Sansera Engineering IPO Price band: Rs 734 - Rs 744

Issue Size: Rs 1265 - 1283 Cr (Offer for sale of up to 1,72,44,328 Equity Shares)

Post Issue Implied Market Cap: Rs 3,771 – 3,823 Cr

Reservation: QIB 50%, Retail - 35%, NII 15%

Employee Discount - Rs 36

Bid lot: 20 shares, and in multiples of 20 shares

IPO Objective

The funds raised from the IPO will be utilized:

• to achieve the benefits of listing the equity shares of the company on the stock exchanges
• to carry out the Offer for Sale of up to 17,244,328 Equity Shares by the Selling Shareholders

About Sansera Engineering

• Sansera is in the business of manufacturing and supplying a wide range of precision forged and machined components and assemblies that are critical for the passenger vehicle, two-wheeler, and commercial vehicle verticals for the automotive sector.
• In the non-automotive domain, it manufactures and supplies a wide range of precision components for off-road, aerospace, agriculture, and other segments.
• In the two-wheeler category, the company has a long relationship with Honda Motorcycle, Bajaj Auto, and Yamaha.
• Sansera is one of the top 10 global suppliers of connecting rods within the Light Vehicle Segment. 
• Sansera has 16 manufacturing facilities, of which 15 are in India and one facility in Sweden as of 31 July 2021.

Key Products of Sansera Engineering

Connecting Rod - A connecting rod is a critical component and converts the reciprocating motion of a piston into the rotary motion of a crankshaft and vice versa.

Rocker Arm - These are produced by the company in various configurations and find application in premium two-wheeler and high-performance passenger vehicles.

Crankshaft - These are available in two configurations and are used in single-cylinder engines of two-wheelers with more than 300cc capacity

Stem comp - This is one of the main automotive products that the company develops. It is an intermediate part of the front-fork assembly in a two-wheeler. For FY21, the company generated close to 4% from the sales of this product.

Components for Aerospace - Sansera supply multiple components within various subsystems of an aircraft such as aerostructure, cargo, actuation, equipment housing, seating, and lighting.

Components for Agriculture Segment - The company supplies multiple types of camshaft forgings to a leading Indian diesel fuel injection system supplier for applications in segments such as agriculture and marine.

Financials

• Even though the FY21 revenue is lesser than FY19 level, the net profit & net profit margin is higher than FY19. 
• The average capacity utilization across units has gone down from 69% in FY19 to 49% in FY21.
• The company has derived 88.45% and 11.55% of its revenue from the automotive sector and non-automotive sectors, respectively in FY21. Hence, the company is susceptible to problems hurting the auto sector like semiconductor shortage. 
• Sansera reported 64.98% of their revenue from the sale of products from India and 35.02% of their revenue from the sale of products from Europe, the USA, and other foreign countries combined in FY21.
• Sansera has a high dependence on a few customers. Bajaj, the largest customer, contributed 20.75% in FY21. Largest 5 customers accounted for 59% of the revenues in FY21.
• According to Sansera, their internal accruals are enough for future capex requirements.

Sansera Engineering's Peer Analysis

The listed peers of Sansera Engineering includes Motherson Sumi, Endurance Technologies, Minda Industries, Sundram Fasteners, Bharat Forge, Suprajit Engineering & Mahindra CIE.

• Compared to the overall industry, the company has done well in maintaining a higher EBITDA margin, PAT margin, and ROE.
• In terms of revenue, the company stands at the bottom of the table given the small size of the company compared to other listed peers.
• Sansera seems fairly priced as per the current PE ratio at 36 times, second lowest among the peers.
• The EPS of Sansera Engineering is looking good compared to peers and it is higher than the most listed peers (second on the table).
• The RoNW is 12.31% and is somewhere around the industry average.

Sansera Engineering USP 

Leading Supplier - The company is the leading supplier of high-quality precision engineered components. These components are gaining market share both across the automotive and non-automotive sectors. They have been awarded business from 35 customers in the automotive sector and from 21 customers in the non-automotive sector across their product portfolio (as of July 31, 2021).

Diversified business model - If you look at the company's business in terms of end segment, customer base, the geographical spread of revenues, and product portfolio, it is highly diversified. Sansera derives its revenue from multiple segments within the automotive sector, including the 2- wheeler, passenger vehicle, and commercial vehicle verticals.

Designing capability - The company is capable in designing and engineering, machine building, and automation resulting in continuous new product development and improved productivity. It has the fungibility of equipment, machinery, and production lines across product families and sectors. Sansera automation division included a team of 27 personnel who work concurrently with the machine and fixture design to implement automation projects intended to increase their productivity and control labor costs.

Growth Potential

Strengthen global market share - They focus on increasing their existing automotive product portfolio and diversify into new products. They plan to consolidate their leading market share, both globally and in India across their existing product portfolio. Also, they intend to develop multiple technology-driven systems and components to cater to growing opportunities in the electrification of vehicles. 

Continue growth in non-automotive business - The company manufacturing capabilities can be extended to manufacture precision components for several non-automotive segments such as off-load, aerospace, agriculture, and capital goods. They focus on manufacturing precision engineered components that require complex engineering capabilities, resulting in high-value addition by them.

Focus on increasing operational efficiencies - The company will continue to focus on improving operational efficiency by taking different initiatives. They have automated a number of their forging and machining operations. They have more than 130 robots installed across all their manufacturing facilities in India.

Risks

Dependency on key customers - If you look at the revenue share of the company, they received 62.37% and 64.41% revenue from their top five customers in FY18 and FY17, respectively. The loss of such customers as a result of a dispute with or disqualification by them may affect the business of Sansera.

Pricing pressure - The company mainly supplies its products to OEMs in India and other countries. The company in the past has experienced pricing pressure from its customers and may not receive it in the future. Any significant pricing reduction in the future may affect the future profit of the company.

Derived demand - The business of Sansera is largely dependent on the performance of the automotive sector in India and European countries. The current semiconductor shortage which is staining the automotive industry can also hurt the ancillary companies like Sansera. However, only 24% of the revenue comes from passenger vehicles, only that portion of the demand is uncertain.

INDmoney Recommendation

Sansera Engineering’s revenue has been in the range of Rs 1,450- Rs 1,600 crore over the last three years, even as the auto industry battles a drop in volumes. The company was able to maintain its topline as around 15% of revenues came from new businesses. Sansera Engineering’s net profit increased by 36% year-on-year to Rs 109 crore in FY21. Over the last three years, both the topline as well as bottomline growth has been above industry average due to addition of new customers and higher content per vehicle. Sansera Engineering has also been able to maintain its EBITDA and net Profit Margins. The company’s debt-equity ratio has now improved to 0.55 from 0.81.

At the higher end of the price band, Sansera Engineering is reasonably priced at a P/E ratio 35.4 times FY21 EPS (on a post-issue basis). This is lower as compared to larger peers such as Motherson Sumi (80 times), Minda Industries (104 times), and  Endurance technologies (44 times).   

Given factors such as steady growth in topline and bottomline, stable margins, good return ratios, improving debt ratios, and reasonable valuations, we remain positive on the long-term prospects of this issue.