YUKEN INDIA

Riding India’s infra bandwagon

Bangalore-based Yuken India was promoted in 1976 in technical and financial collaboration with Yuken Kogyo Company Ltd, Japan (YKC) which today holds a majority 56.16 per cent equity stake in the Indian company. The Japanese company is an undisputed leader in oil hydraulic equipment. YKC has specialized in the design and manufacture of hydraulics, supplying hydraulic equipment and systems to various downstream industries.

The company’s financial performance is satisfactory, though it is not doing that well on profitability front. During the last 12 years, its sales turnover has more than doubled from Rs 180 crore in fiscal 2012 to Rs 373 crore in fiscal 2023, but its operating profit has improved modestly from Rs 23 crore to Rs 32 crore and the pretax profit has remained stagnant at Rs 16 crore. However, prospects going ahead are all the more promising. Consider:

• fter 48 years, the company has become the preferred source for hydraulics for a wide range of industries, including automotive, agriculture, cement, construction equipment, drill rigs, defence, machine tools, material handling, marine, paper presses, plastics, railways, rubber and steel. Almost all these industries are doing quite well and their near-term outlook is highly encouraging.

INFRA PUSH

• The optimism related to the company’s performance is derived from the larger growth story of the Indian economy, which is poised at an inflection point, with the Indian government announcing a disproportionate increase in infrastructure outlay. YIL is attractively placed to capitalize on the India growth story. The company is preparing itself through capacity creation across the en tire range of products in its global portfolio, funded by continued equity infusion by its Japanese parent company. Yuken Kogyo increased its stake in the Indian company by 4.62% with a capital infusion of Rs 62.90 crore in June 2023.
• Besides, this capital inflow is being accompanied by the transfer of technology that will empower the company to manufacture the complete range of products of Yuken Kogyo in India. This decision affirms YIL’s capabilities and the attractiveness of India as a long-term growth and strategic market.
• In the December 2023 quarter, sales grew 24% to Rs 107.45 crore. OPM improved from 10.5% to 11.7%. PAT jumped 91% to Rs 5.55 crore. For the nine months, sales grew 12% to Rs 303.30 crore. OPM improved from 10.1% to 9.8%. PAT grew 21% to Rs 10.87 crore.

COVID HICCUP

• The company’s relatively muted past performance was due to several large pre-Covid contracts that were executed during the last year. While the company had negotiated price revisions, they were not in line with the enhanced material costs. This resulted in lower margins. The depreciation on account of enhanced capex over the last few years and their related funding costs dented profits further. The trend has now reversed.
• All the subsidiaries have turned around and are contributing to YIL’s growth, profits and cash flow. The company has also stabilized the manufacture of electric motors and is enhancing manufacturing capacities. Soon the company will manufacture filters and accumulators. Since all these components are used in its power units, they will not only ensure quality but also enhance profitability. In FY 2024, we expect the company to register EPS of Rs 13.6, which is likely to rise to 24.7 in FY 2025. In FY 2026, the company can report EPS of Rs 33.9. The scrip trades at Rs 1,247. P/E on the FY 2026 EPS works out to 28.3.

PERFORMANCE INDICATORS (Rs. in crore)

NELCAST

Pole player in automotive castings

Nelcast is one of the largest players in the Indian ductile iron/grey castings market and manufactures several complex castings, including axle housings, clutch housings and bogie suspension brackets. It caters to the M&HCV and tractor segments of the automobile industry, both in the Indian and export markets. Besides a strong position in the domestic market, the company is rapidly growing its presence across North America, Europe and Southeast Asia. The promoters’ stake was 74.87% as of Dec 31, 2022. The company has a distinguished customer base of over 40 customers who include original equipment manufacturers (OEMs) and Tier-1 customers in the commercial vehicle, tractor, off-highway equipment, railways, and passenger vehicle segments. The company is doing quite well on the financial front. Its prospects going forward are all the promising. Conside

• Going forward, the commercial vehicle (CV) segment is expected to remain strong, driven by gradual recovery in economic activities, thrust on infrastructure spending, favourable freight rates and improved utilisation of fleet capacities. The tractor segment is expected to show moderate growth in FY23. Given the strong government policy support, the company is well-placed to gain from growth of the automotive industry.

TRACTOR FACTOR

• During the March 2024 quarter, the M&HCV segment continued to perform well while tractor sales were impacted on the back of normal seasonality. The management expects the growth momentum to continue in the M&HCV segment and the impact of seasonality to remain in Q4FY23 for the tractor segment. However, with the rural economy expected to get a boost due to the elections, tractors are expected to report good growth in FY24 and FY25
• The company has met its guidance of about 85,000 tonnes in FY23. It did 21,513 tonnes in Q3FY23, compared to 17,571 tonnes in Q3FY22 and 22,090 tonnes in Q2FY23. The lower QoQ volume was due to transformer failure and a decrease in tractor demand. But the company was confident of achieving 85,000 tonnes of sales volume in FY23 and 100,000-102,000 tonnes in FY24.
• The domestic CV industry volume is still short of its FY19 peak, but with the current recovery in CV demand boosted by infrastructure investment, scrapping of old vehicles and efforts to reduce total cost of ownership, the company is expected to see strong volume growth in the domestic market. An improvement in rural sentiment with increased agricultural income on the back of good agri output and higher prices for produce are to drive the demand for tractors going forward, though Q4FY23 may see some impact of seasonality. This is expected to boost domestic volumes for the company. A strong order backlog, addition of new customers, and new products will drive export volume for the company. Expect new product launches to be fully ramped up by the next quarter
• The company is confident of closing FY23 with a sales volume of 85,000 tonnes and about 100,000-102,000 tonne in FY24, with 30% of the total volumes coming from exports. The company is confident of double digit growth in the topline for FY25 on the back of higher volumes and higher realization.

COST CUTTING

On the profitability front, the benefits of operating leverage, an increased share of renewable power in the total power requirement of the company, and other cost efficiency measures are set to boost margins. The company expects EBITDA per tonne to be at Rs 15/kg for FY25. In fiscal 2024, the sales turnover has almost doubled to Rs 1,267 crore from Rs 615 crore three years ago in fiscal 2021, with operating profit also doubling from Rs 42 crore (2021) to Rs 92 crore (2024). In FY 2025, we expect the company to register EPS of Rs 8.05, which is likely to rise to Rs 9 in FY 2026. The scrip trades at Rs 152. P/E on FY 2025 EPS works out to 20.7.

PERFORMANCE INDICATORS (Rs. in crore)