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Monday, September 22, 2008

Banco products - Good small cap stock for investment

A de-risked business model, low valuations and strong financials make Banco Products an attractive pick even for conservative small cap investors

BANCO PRODUCTS is one of the leading manufacturers of radiators and gaskets in India. The company supplies these products to the automotive industry. Its clientele includes companies like Maruti Suzuki, Tata Motors, Mahindra & Mahindra (M&M) and Ashok Leyland (ALL).
The company sells around four-fifths of its products to original equipment manufacturers (OEMs) and the remaining is targeted at the replacement market. There has been a slowdown in auto sales due to high interest rates, which has also impacted auto component manufacturers, and Banco is no exception to the slump. However, around onethird of Banco’s sales come from exports, which shows that the domestic auto slowdown will not be as harsh on the company as for other players in the industry.
Approximately 30% of its sales come from the non-auto segment like earth-moving equipment and industrial engines; the management expects this segment to do better and boost the company’s overall financials. This, in fact, de-risks Banco’s business model compared to those of auto manufacturers, which depend entirely on the auto industry.

FINANCIALS:
Banco’s net profit more than doubled in the quarter ended June ’08. Its performance was robust considering the pressures of slowing demand and high raw material prices on the industry. The company’s margins are showing improvement on a constant basis. Its operating margin improved to 17.8% in FY08 from 14.2% in FY06, largely due to the cost-control measures undertaken by the company.
Banco has also been passing on the increase in the price of raw materials to the end customer, which shows its bargaining power. The improvement in margins gave the company access to positive free cash flows in FY08, despite spending Rs 12 crore on capital expenditure. The company has very low debt levels, as it has a debt-equity ratio of only 0.16. This shows that in the event of a slowdown, it will not be burdened by fixed interest costs.

VALUATIONS:
The stock trades at a price-toearnings (P/E) multiple of 4.3 times on a trailing 12 months (TTM) basis. This is perhaps the lowest multiple compared to other auto component manufacturers like Omaxe Auto, Autoline Industries, Talbros Auto and JBM Auto, which compete in the same segment. The valuations seem cheaper considering the return on capital employed (RoCE) of 36.8% in FY08 vis-à-vis an average RoCE of 16% for other players. At the current prices, it has a dividend yield of 4%, which makes it attractive even for defensive investors.

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