Banco Products -An auto ancillary play‏

NameReco DateReco priceTargetProspero RatingReport Date*
Banco Product10May14 Rs. 81Rs. 130 – Rs. 1506 / 1010May2014

A) Company background: Banco Products is a Baroda-based manufacturer and supplier of high quality radiators, inter-coolers, oil-coolers and all types of engine gaskets. – Approximately 30% of the standalone sales come from exports to replacement markets in Europe and Japan. The company has a large presence in Europe through its Netherlands based subsidiary NRF BV. – Domestic business constitutes 70% of the standalone sales, 85% of which is to OEMs in the 2 wheeler, 4 wheeler, construction equipment, agricultural equipment and railways sectors. Its domestic customers include Maruti, Tata Motors, Hero Honda, TVS, Eicher, M&M, BEML, TAFE, etc.


B)   Investments arguments:

1) Stable domestic business: The company has a long history of supplying quality radiator and gasket products to major OEMs in India. It also has reasonable presence in the replacement markets. Although domestic business has slowed down over FY13-14 on account of sharp slowdown in cars and construction equipment, it has been able to maintain healthy margins. Revival in Indian economy will significantly improve the performance of the domestic business.2) Potential turnaround in the Europe business: Banco acquired NRF from its bankrupt parent in 2010 for a consideration of Rs 110cr. NRF is a leading supplier of radiators and heat exchangers for automotive and marine industry. NRF underwent a two year long restructuring drive, turned around in FY14 and started generating profits. We expect the profits to improve over FY15 as Banco reaps the benefit of revival in European auto market.

3) Sale of cement plant: Banco had invested Rs 60cr for purchasing 50% stake in Lake Cement, a Tanzania based cement maker. This was widely criticized by the investor community as an unrelated diversification. However, now that the company sold its stake on 8-May-2014 for a consideration of Rs 102cr, it will make many investors look into it again. The sales proceeds could virtually make the company debt free. The company is back to being a pure auto ancillary player!

4) Decreasing Debt: Banco had decreased good portion of the debt in the current year and with the sale of Cement plant debt repayment could further accelerate. 5) Long term player: Banco Products is a credible player in the Indian & European auto components space with a long operating history of more than 25 years. Acquisition of NRF & Lake Cement in 2010 saddled the company’s otherwise debt-free balance sheet with borrowings. This coupled with the sharp slowdown in Indian automobile and construction equipment space depressed earnings as well return ratios. With the turnaround in NRF and the sale of Lake Cement, both these pain points have been resolved. We believe that the company will be virtually debt free and generate EPS of Rs. 16/share. This can lead to a much higher target price of Rs 130-150 in a couple of years.

C) Financials:

*Report Date may sometimes be different from Recommended Date.

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