SECTOR: AUTO ANCILLARY

ZF Steering Gear (India) Ltd.

STOCK INFO. BLOOMBERG

BSE Sensex : 19,318 S&P CNX : 5,800

(Consolidated) Y/E MARCH

ZFSG.IN
REUTERS CODE

26 November 2010
Initiating Coverage
(` CRORES)

BUY
`350

ZFST.BO

FY10A

FY11E

FY12E

Net sales EBITDA RPAT BV/Share (`) Adj. EPS (`) EPS growth (%) P/E (x) P/BV (x) EV/EBITDA (x) Div yld (x) (%) ROE (%) RoCE (%)

216 49 29 149.5 32.8 93 10.7 2.3 6.9 2.4 24 28

297 82 47 189.9 52.2 59 6.7 1.8 4.1 2.9 31 37

341 91 53 234.5 58.6 12 6.0 1.5 3.6 3.4 28 34

We initiate coverage on ZF Steering with a BUY recommendation for a target of `465 - 3.6xFY12 EV/EBITDA. Low liquidity is a concern.
INVESTMENTARGUMENTS:

Volume benefits from CV upcycle with added upsides if LCVs convert Key clients to see strong growth over FY10-FY12E Large Cash and Cash equivalent and strong ROE are positives
GROWTH DRIVERS

KEY FINANCIALS Shares Outstanding (cr) Market Cap. (`cr) Market Cap. (US$ m) Past 3 yrs Sales Growth (%) Past 3 yrs NP Growth (%)

0.9 317 71 0% 1%

STOCK DATA 52-W High/Low Range (`) Major Shareholders (as of March 2010) Promoter Non Promoter Corp Holding Public & Others Average Daily Turnover(6 months) Volume Value (`Cr) 12/6/1 Month Rel. Performance (%) 12/6/1 Month Abs. Performance (%) 519/196 73.2 0.0 26.8 14581 0.6 -14/31/64 -18/49/78

Maximum Buy Price : ` `375

Key beneficiary of CV upcycle with upsides from LCV conversion : A 34% sales volume growth in buses to 43,081 units and 23% growth in trucks to 201,977 units in FY10 resulted in a 34% growth in Heavy Commerical Vehicles (HCV) sales to 245,058 units. Growth in CVs is likely to be above 25% in FY11 and 15% in FY12. ZF Steering is a supplier of power steerings with little competition in the HCV segment and stands to gain from this upcycle. If Power steering becomes mandatory in the LCV segment, there will be additional growth in volumes for ZF Steering. Key clients in the CV segment to witness strong growth : Key clients such as Tata Motors Ltd., Force Motors Ltd., Ashok Leyland Ltd. and Volvo India Pvt. Ltd. control >95% of the commercial vehicles market in India. Our estimates for Tata Motors for FY11 and FY12 stand at 30% and 14% growth, while Ashok Leyland has guided for volumes of 95,000 CVs in FY11 vs. 65000 in FY10. Almost 65% of the Tata Motors demand and 35% of Ashok Leyland's demand is met by ZF. Given the strong growth for key customers, ZF Steering is likely to see strong demand for its products over FY10-FY12. Large cash equivalent of ` `118 per share and 33% target payout: As of Sep-10 end, the company had investments of `102 cr or `118 per share. Some of this cash will be used to add capacity for new products that will expand the company's offering to its customers. The company aims to payout 33% of its earnings as dividend.we estimate over `20 of dividend payout over the next 2 years. Valuations and View: Revenues growth of 25%+ CAGR over FY10FY12 and 30% earnings CAGR is estimated to aid ROE improvement to 28-30% range despite a higher investment balance. Valuations are currently attractive at 6.7XFY11E and 6.0xFY12E earnings and a 3.4% dividend yield for FY12E. Valuations net of cash per share of `118 are even more attractive.
Manu Saxena (manu.saxena@MotilalOswal.com); Tel: +91 22 30896842

Ravi Shenoy (ravi.shenoy@MotilalOswal.com); Tel: +91 22 30896865

ZF Steering Gear (India) Ltd.

CONCERNS Limited Management Interaction The Management does not meet or interact with analysts other than at the AGM and hence updates on performance will be sketchy. We attended the AGM and witnessed the open interaction between the management and shareholders and had an opportunity to hear the views of the next generation of promoters on the business. Foreign partner's direct entry into India Another key concern is the new product introduction through a 24% JV with the foreign collaborator, but the management indicated that these products will take time to catch up in the Indian market and will not cannibalize the company's products. BACKGROUND Z F Steering Gear (India) is promoted by H K Firodia, J H Munot and ZahnradfabrikFreidrichshafen, Germany., The company manufactures, assembles and deals in steering gears with a installed capacity is 1,80,000 units of Mechanical Steering Gears and 2,70,000 units of Power Steering Gears and 50,000 units of Hydraulic Rack & Pinion Steering Gears per annum. The company is in the process of ramping up the Mechanical Steering Gear capacity to 2,10,000 units and Power Steering Gear capacity to 3,00,000 units Per Annum. The company has its plant at Village Vadu Budruk, Maharashtra. The German collaborator has a 26% stake in the company. The company's steering gears find application in buses and also in heavy vehicles like dumper and haulage trucks, and are supplied to original equipment manufacturers. FINANCIALS AND RECENT RESULTS: Revenues, EBITDA and Net Income in the quarter ended Sep-10 grew 46%, 64% and 46% respectively on a low base. Performance during 2HFY11 and FY12 is likely to be comparatively muted given lower growth expected in the CV business on account of a higher base. Performance is based on the Commercial Vehicle cycle and hence revenues are cyclical.

` CRORES

QE SEP-09

QE SEP-10

% Y/Y

Revenue Expenditure EBITDA (excl. Other income) Other Income Interest Depreciation Profit before tax Tax RPAT

50.2 40.4 9.9 1.3 0.0 1.8 9.4 3.0 6.4

73.3 57.1 16.2 1.3 0.0 3.6 13.9 4.5 9.4

45.9 41.5 64.0 -4.5 0.0 97.2 48.0 52.4 46.0

EBIDTA (%) Tax rate (%)

19.7 31.5

22.1 32.4

26 November 2010

ZF Steering Gear (India) Ltd.

IVRCL: Financials and Valuation

ZF Steering Gear (India) Ltd. - Financials & Valuation

INCOME STATEMENT (Consolidated) Y/E MARCH 2008A 2009A (` CRORES) ` 2010A 2011E 2012E RATIOS Y/E MARCH 2008A 2009A 2010A 2011E 2012E

Net Sales growth (%) Other Income Total Income Staff Costs Mfg. & other expenses Admn, S&D Exp. Other Expenses Total Expenditure EBITDA % of Net Sales Depreciation/Amortization Finance Charges PBT Tax PAT growth (%) PAT MARGIN (%)

223 3 7 229 12 158 7 2 179 51 23 10 1 40 12 28 1 12

166 -25 4 170 13 119 6 2 139 30 18 8 1 22 7 14 -49 8

216 30 6 222 17 149 4 2 173 49 23 8 0 41 13 29 100 13

297 38 10 307 24 196 4 2 226 82 27 15 0 67 19 47 65 15

341 15 9 350 26 227 4 2 259 91 27 16 0 75 22 53 12 15

Basic (`) ` Adjusted EPS Growth (%) Cash EPS Book Value DPS Payout (Incl. Div. Tax) (%) Valuation (x) P/E Cash P/E Price/Book Value EV/EBITDA EV/Sales Div. Yld (%) Profitability Ratios (%) RoE RoCE Leverage (x) Debt/Equity (x)

31.7 -1 43.2 120.3 8.0 30

17.0 32.8 -46 93 25.8 41.2 127.9 149.5 7.0 8.5 48 30

52.2 58.6 59 12 68.1 75.9 189.9 234.5 10.0 12.0 22 24

11.0 8.1 2.9 6.5 1.5 2.3

20.6 13.6 2.7 10.6 1.9 2.0

10.7 8.5 2.3 6.9 1.6 2.4

6.7 5.1 1.8 4.1 1.1 2.9

6.0 4.6 1.5 3.6 1.0 3.4

29 33 0.2

14 17 0.2

24 28 0.2

31 37 0.2

28 34 0.1

BALANCE SHEET Y/E MARCH 2008A 2009A 2010A

( ` CRORES) 2011E 2012E

CASH FLOW STATEMENT (Consolidated) Y/E MARCH 2008A 2009A 2010A

(` CRORES) ` 2011E 2012E

Equity Share Capital Reserves Shareholders' Funds Debt Net deferred tax Sources of Funds Net Block Investments Current Assets Inventories Sundry Debtors Cash and Bank Balances Loans and Advances Other Current Assets Current Liabilities & Prov. Net current assets Misc expenses Application of Funds

9 100 109 22 -3 129 35 51 70 29 28 6 7 0 27 43 1 129

9 107 116 23 -3 136 29 60 69 32 16 17 5 0 23 46 0 135

9 126 136 28 0 164 50 90 54 21 21 4 7 0 31 23 0 164

9 163 172 26 2 200 81 80 78 31 31 8 7 0 38 39 0 200

9 204 213 24 4 241 90 100 95 37 37 13 7 0 44 50 0 241

PBT before EO items Add : Interest (Inc)/Dec in WC Others CF from Operating activities (Inc)/Dec in Fixed assets Others CF from Investing activities Inc/(Dec) in debt Dividend paid Less: Interest paid Others CF from financing activities Inc/(Dec) in cash Add: Beginning balance Closing Balance Depreciation

40 10 -5 9 -24 30 -9 -8 -17 -9 0 0 -7 -7 6 1 6

22 8 -1 7 -9 26 -2 -6 -8 2 -8 0 1 -8 11 6 17

41 8 -3 10 -8 48 -29 -26 -55 6 -11 0 6 -6 -13 17 4

67 15 0 -12 -19 51 -45 10 -35 -2 -9 0 0 -12 4 4 8

75 16 0 -7 -21 63 -25 -20 -45 -2 -11 0 0 -13 4 8 13

26 November 2010

ZF Steering Gear (India) Ltd.

PEER COMPARISON (FY10)

ZF STEERING

SONA KOYO

RANE MADRAS

Sales (`cr) 3 yr growth (%) Adj. Profit (`cr) 3 yr growth (%) P/E (x) EV/EBITDA (x) D/E (x) ROE (%)

216 0 29 1 10.7 6.9 0.2 24

850 12 22 -7 17.7 7.8 1.5 8

420 8 14 0 12.3 5.8 0.5 19

Period: Year-ended March 2010

ZF Steering Gear (India) Ltd. Valuation Chart (Historical EV/EBITDA)

EV/EB ITDA 9 8 7 6 5 4 3 2 1
Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Mar-10 Nov-10 Jul-02 Jul-03 Jul-04 Jul-04 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10

Average E V/EBITDA

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