7 NOVEMBER 2016

SECTOR: AUTO ANCILLARY

Sterling Tools Limited

BSE SENSEX

27458.99

S&P CNX

8497.05

(INR CRORES)

CMP: INR913 TP: INR1207 (+32%)

Buy

Y/E MARCH

Revenue

EBITDA

EBITDA Margin

NP (Adj.)

EPS (Adj.)

EPS Growth

BV/share

Core ROE (%)

Core ROCE (%)

P/E (x)

P/BV (x)

FY16

367

61

16.7%

29

41.6

34%

189

23

24

22.0

4.8

FY17E

414

72

17.3%

35

51.0

21%

224

25

27

17.9

4.1

FY18E

466

83

17.8%

41

60.3

18%

267

25

27

15.1

3.4

KEY FINANCIALS

Diluted Shares (cr)

Market Cap. (Rs cr)

Market Cap. (US$ m)

Past 3 yrs Sales Growth (%)

Past 3 yrs NP Growth (%)

0.7

625

94

10%

43%

STOCK DATA

52-W High/Low Range (INR)

Major Shareholders (as of Sep 2016)

Promoter

Institutions

Public & Others

Average Daily Turnover(6 months)

Volume

Value (Rs cr)

1/6/12 Month Rel. Performance (%)

1/6/12 Month Abs. Performance (%)

1030/365

70.2

0.4

29.4

7,133

0.6

18/89/138

14/81/140

We recommend to BUY Sterling Tools Limited (STL) for a

target of INR 1,207 - 20x on FY18E EPS (+32% Upside).

One of the largest fastener manufacturers in India:

Sterling Tools

is one of the largest manufacturer of fasteners in India, with a market

share of ~28%. The company is supplier of high tensile (HT) fasteners

to Honda Motorcycle Scooter India Private Limited (HMSI) and Maruti

Suzuki India Limited (MSIL). In top line 2-wheeler accounts for 25%

, passenger vehicles (~15%), commercial vehicles (~25%), and farm

equipment (~7%-8%) of total sales. STL's other customers include

Tata Motors, Ashok Leyland, Daimler, FIAT, Hero Motocorp,

Mahindra & Mahindra, Volvo, Eicher, TAFE and General Motors. Sales

to OEM form ~85%, after market ~8% and exports constitutes ~7%

of total revenue. STL has a capacity of 45,000 MT spread across

three plants currently running at 70-75% utilisation. The company has

started work on the phase-I expansion for a new plant in Gujarat.

Total capex for the project will be INR 50cr likely to be commissioned

by September 2017.

Triggers in place for an uptick in automobiles sales:

Good

monsoons and 7th pay commission have accelerated the volume growth

for the leading automobile companies across segments. STL's major

principal's Maruti Suzuki and HMSI reported 13.5% YoY and 23.5%

YoY volume growth respectively for 3 month period Aug-Oct 2016.

Passenger vehicles, 2 wheelers, commercial vehicles or tractors all

are poised to post strong volume growth in FY17. STL's strong market

positioning in automobile fastener segment having sizeable market share

in OEMs lends heft to its growth prospects for foreseeable future.

Strong financials:

The company delivered a CAGR of 10% in revenues

during FY13-16; during the same period PAT delivered a CAGR of

43% aided by improving margins and cash flows. Strong focus on

costs and tight control over working capital has yielded desired operating

efficiencies for the company. Sound balance sheet management has

led to sharp improvement in return ratios over the years. [ROE 11% in

FY13 to 23% in FY16, ROCE:15% in FY13 to 24% in FY16].

Valuations & View:

Conducive macro factors like good monsoons,

7th pay commission roll out, passage of GST, increasing localization

by OEMs will propel STL on growth path going forward. We expect

earnings growth of 20% over FY16-18E. STL trades at 15.1x FY18E

EPS of INR 60.3. We initiate coverage on the stock with a 'BUY'.

We value the company at 20x FY 18E EPS with a target price INR

1,207, giving an upside of 32%.

Dharmesh Kant (Dharmesh.Kant@motilaloswal.com); Tel: +91 22 30102470

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Sterling Tools Limited

Exports:

Exports form ~7% of the total revenues of the company. The company currently exports to Europe.

The company is focusing on North American market and is planning to increase its exports to that market.

Over the next 4-5 years, the company envisions to take the share of exports to ~20-25% of total revenues.

Localization Opportunity:

The principal OEM's like MSIL and HMSI are driving a localization exercise to

reduce their exposure to Japanese suppliers for supply of key automotive components. This strategy will

reduce the foreign exchange exposure as well as the procurement costs of these auto majors. STL with its

leading market share in the fasteners segment stands to benefit from this opportunity as the addressable market

for fasteners will open up going forward.

INVESTMENT CONCERNS

High competition from un-organized segment:

Within the auto-component space, the fastener segment is

characterized by high-competitive intensity given the presence of numerous players in un-organized segment in

after sales market. However, STL by virtue of its strong relationships with OEMs has diversified its presence

in the relatively complex product categories like engine fasteners.

Company background:

Sterling Tools Limited (STL), founded in 1979, engages in manufacturing of high-tensile (HT) cold forged

fasteners mainly for automobiles OEMs. STL is one of top 3 fasteners manufacturers in India and caters to

leading automotive companies in India and Europe. Product range includes over 2,000 types of fasteners

ranging from 5 mm to 24 mm in diameter. It includes special fasteners, standard fasteners, surface treatment

and coatings, chassis fasteners and engine fasteners. The Company has three manufacturing plants in Haryana

with a total capacity of 45,000 MT. STL is the one of the largest supplier of HT fasteners to Honda and the

second largest supplier to MSIL. Company's other blue chip customers include Tata Motors, Ashok Leyland,

Daimler, FIAT, Hero Motocorp, Mahindra & Mahindra, Volvo, Eicher, TAFE and General Motors.

7 November 2016

2

Sterling Tools Limited

IVRCL: Financials and Valuation

Sterling Tools Limited Financials & Valuation

INCOME STATEMENT

Y/E MARCH

FY14

FY15

(INRCR)

FY16 FY17E FY18E

RATIOS

Y/E MARCH

FY14

FY15

FY16 FY17E FY18E

Net sales

Growth

COGS

Employee Cost

Other Expenses

EBITDA

EBITDA Margin

Depreciation

Other Income

Interest Cost

PBT

Tax

Rate

Adjusted PAT

Growth

PAT Margin

295

7%

131

26

103

42

10

1

8

24

9

36%

15

55%

335

14%

147

28

120

47

12

1

7

29

8

22

41%

367

10%

145

33

133

61

13

2

6

43

15

29

34%

414

13%

166

37

146

72

14

1

5

53

18

35

21%

466

13%

188

42

160

83

16

1

6

63

21

41

18%

Adjusted EPS (INR)

Book Value

Div Per Share

Dividend Payout

Net Debt / Equity

P/E

P/BV

Dividend Yield

EV/EBITDA

ROCE

ROE

Debtor days

Inventory days

Creditor days

W.Cap cycle

22.9

147

5.0

22%

0.5

-

-

0.5%

-

18%

16%

43

57

57

42

31.1

171

5.0

16%

0.5

-

-

0.5%

-

19%

20%

43

58

65

37

41.6

189

15.0

36%

0.3

22.0

4.8

1.6%

10.9

24%

23%

37

54

69

22

51.0

224

12.8

25%

0.2

17.9

4.1

1.4%

9.1

27%

25%

37

60

64

33

60.3

267

15.1

25%

0.1

15.1

3.4

1.7%

7.7

27%

25%

37

60

71

26

14.1% 14.1% 16.7% 17.3% 17.8%

26% 34.4% 34.0% 34.0%

5.2% 6.4% 7.9% 8.4% 8.9%

BALANCE SHEET

Y/E MARCH

FY14

FY15

(INRCR)

FY16 FY17E FY18E

CASH FLOW

(INRCR)

FY14

FY15

FY16 FY17E FY18E

Y/E MARCH

Share Capital

Reserves

Networth

Minority interest

Loans

Less Net Def. Tax Liab

7

94

101

0

58

13

7

110

117

0

61

14

1

193

131

0

42

40

1

12

2

0

96

44

53

10

193

7

122

129

0

55

15

1

199

138

1

42

37

12

12

1

0

103

47

56

4

199

7

147

154

0

62

14

1

230

153

1

27

42

35

12

1

0

118

46

72

4

230

7

176

182

0

62

14

1

259

167

2

31

47

49

14

1

0

143

56

87

4

259

Less other long term liability 1

SOURCES OF FUNDS

173

Net Fixed Assets

Capital WIP

Inventories

Debtors

Cash & Investments

Loans & Advances

Other Curr Assets

Current investments

Curr. Assets

Creditors and Prov.

Net Current Assets

Other LT Assets

110

3

35

35

6

5

2

0

83

34

49

11

PBT

Adjustments

(Inc)/Dec in W.Cap

Others

Pre Tax OCF

Tax Paid

CF from Operations

(Inc)/Dec in FA

Net investments

Others

CF from Investing act.

Equity issuance

Inc/(Dec) in Debt

Interest Paid

Divd Paid (incl Tax)

Others

CF from Financing act.

Inc/(Dec) in Cash

Add: Opening Balance

Closing Balance

24

18

10

5

56

(8)

49

(16)

(1)

1

(16)

0

(18)

(8)

(4)

(3)

(34)

(2)

8

6

29

18

(6)

(6)

35

(7)

28

(29)

(1)

1

(28)

0

3

(7)

(4)

3

(5)

(5)

6

1

43

18

8

1

70

(14)

56

(26)

0

2

(24)

0

(6)

(6)

(12)

4

(21)

11

1

12

53

19

7

0

78

(18)

61

(30)

0

1

(29)

0

5

(5)

(9)

0

(9)

23

12

34

63

20

(1)

3

85

(21)

64

(35)

0

1

(34)

0

0

(6)

(10)

0

(16)

14

34

49

APPLICATION OF FUND 173

7 November 2016

3

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