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PENNY WISE

Jamna Auto, India's largest manufacturer of suspension springs and part of the Jai group of industries, is increasing its market share and revenues by consolidating its operations and moving up the value chain.

The company has merged two other units of the group"�-Jay Parabolic and MAP Springs "�with itself. While Jamna Auto has plants in Yamunanagar (Haryana) and Malanpur (Madhya Pradesh) with a capacity of 24,000 metric tonnes per annum (mtpa) and 48,000 mtpa respectively, Jai Parabolic has a facility in Chennai with a capacity of 42,000 mtpa. Both companies make leaf and parabolic springs for commercial vehicle manufacturers, while MAP Springs is a marketing outfit.

Merger and expansion

The merger will create an entity with a combined capacity of 1.14 lakh mtpa and this will result in lower procurement costs for the company and multiple sourcing points for customers. In addition to this, the company is setting up two greenfield units, one an assembly plant at Uttaranchal and the other a manufacturing unit at Jamshedpur.

The Jamshedpur plant, which will have an initial capacity of 30,000 mtpa in FY09, will be scaled up to 60,000 mtpa by FY10. The company expects both the units to be operational by September 2008. The company is also adding capacity equivalent to 24,000 mtpa at its Malanpur unit.

The expansion plans, put together, will cost Rs 120 crore, of which, it has already spent Rs 40 crore, with the balance accruing from funds already raised through warrants and internal sources, to be spent over the next 15 months.

With these capacities, the company expects its share of the Indian OEM market to jump to 75 per cent from the current 63 per cent. At 1.98 mtpa, the company believes that it will become the second largest maker of suspension springs globally.

Higher margins and exports

The company is focussing on higher margin parabolic springs which fetch 16 per cent margins in the domestic market and 20 per cent margins in the export segment vis-a-vis leaf springs which fetch 11 per cent.

For FY07, leaf springs accounted for 97 per cent of sales, while parabolic springs for only three per cent. Shakti Goel, CFO, Jamna Auto believes that parabolic springs will account for 10 per cent of revenues by FY10 and a large part of this will come from the lucrative European market.

The company has been negotiating for lower rates with steel suppliers for its 11,000 tonne monthly steel requirement. Steel accounts for 60 per cent of the selling price and thus far Jamna has been able to pass on price hikes. These measures have helped it to improve operating margins from 7 per cent in FY07 to 10.8 per cent for the nine month period ended December 2007. 
 

STRONG SUSPENSION
Rs crore	9MFY08	FY08E	FY09E	FY10E
Sales	309.62	496.00	664.00	863.20
Operating Profit	37.52	57.54	78.35	129.48
Net Profit	10.58	11.40	29.20	51.79
EPS (Rs)		3.42	7.70	13.67
P/E (x)		17.53	7.79	4.39

Investment rationale

With margins improving, reduction of high cost debt (helped by funds raised from Clearwater Capital), global capacities and new markets, Jamna is expected to post revenues exceeding Rs 850 crore by FY10 from the estimated Rs 500 crore in FY08.

At Rs 60, the stock is available at 7 times its estimated FY09 earnings of Rs 7.7 and just 4.3 times its FY09 earnings of Rs 13.67. With higher growth and revenues percolating down to earnings, investment in this stock should generate about 40 per cent returns in the next one year.