ZF is well positioned to ride the increase in sales in the CV segment, especially M&HCV. ZF has enough capacity for the next 2-3 years. We expect ZF to operate at higher levels leading to higher capacity utilization and improvement in RoCE. This could also lead to economies of scale and improvement in margins. Higher wind power capacity also reduces the company’s dependence on the grid, which augurs well for the company
While the Indian promoters hold a 47.36% stake (up from 46.08% in June 2008), Zahnradfabrik-Freindrichshafen, Germany holds a 25.79% stake. Total promoter stake in the company currently is 73.15%. The Indian promoters are the Kinetic Group while ZF Germany is a joint venture that is partly-owned by Robert Bosch GmbH (BOSCH) and ZF Friedrichshafen AG. We believe that a promoter restructuring is possible, albeit the timing is uncertain. At the moment the financial position of foreign parent company (the joint venture) is not very strong and hence there could be a change in ownership in the foreign promoter.
Expect ZF to report sales of Rs. 268 cr in FY11 (E), registering a growth of 24% y-o-y, operating margins of 21.1%, an expansion of 60 bps y-o-y due to power cost savings and higher capacity utilization and a PAT of Rs. 36.5 cr, up 27.3% y-o-y. This translates into an EPS of Rs. 40.2 per share and cash earnings of Rs. 55.6 per share. ZF follows a very aggressive depreciation policy and the average rate of depreciation provided by the company over FY07-FY10 is about 22-23% of the written down value. This is slated to increase with the addition of windmills at the end of FY10. Further, ZF has limited use of these strong cash flows as it does not need to invest in core business expansion. Hence we believe, that cash earnings per share is a more appropriate way to value the company. At the CMP of Rs. 401.70, ZF is trading at 7.2x its FY11 (E) cash earnings of Rs. 55.6.
ZF could be bought at the current market price and added on declines to the Rs. 362-373 band for sequential price target of Rs. 444 and Rs. 472 (8-8.5x FY11 (E) cash earnings) over the next 2-3 quarters.
