Force Motors flying time? Multibagger

Force Motors Ltd. (Force Motors) is an automobile company specializing in
manufacture of MUV, LCV, SUV and Tractors. It also expertise’s in design,
development and manufacture of automotive components and aggregates. It has
technical collaboration with Daimler AG, Germany in respect of multi-purpose
vehicles. The company started its first commercial production in 1958 from
manufacturing location in Goregaon, Mumbai. While undergoing many transitions
over last five decades it always maintained high standards of technological
excellence and quality.



Key rationales for accumulating Force Motors:

1) Force Motors is a vertically integrated automotive company catering to niche
markets of Middle East, Asia, Latin America and Africa. It’s ever increasing
diversified product portfolio is developed on principles of engineering
expertise, utility, performance and value. Over the last five decades it has
collaborated with leading global automotive companies to develop in-house
expertise for design, development and manufacture of automobiles, their
sub-systems, components and aggregates.
2) On an average 80% of vehicles sold by Force Motors is in the category of
LCV, UV and SUV segment while tractors constitute around 15%. It’s most
popular vehicle is ‘Traveller’ which was originally designed and produced by
Mercedes Benz AG, Germany as ‘T1 Transporter’. It has been making small
but steady foray into small commercial vehicles segment under brand name
of ‘Trump 40’.

3) Force Motors has capacities in place to handle upturn in utility and
commercial vehicle demand on economy returning back to growth trajectory.
Last couple of years had been difficult for automobile industry particularly
for utility and commercial vehicle manufacturers. Macro-economic situation
has changed rapidly over last quarter. Eye catching pick up is noticed in
industrial and manufacturing activity. General sentiments have also improved
dramatically since new Government took charge. The company is well
positioned to handle growth of 15 to 20 percent for next three years.

4) The company has set up ‘Advanced Technology Centre’ at Akurdi for engine
and vehicle testing. It undertakes project work on design, development and
up gradation of engine configurations in various displacements and capacities.



5) Force Motors also manufactures Diesel Engines. To augment engine
manufacturing capacity it is setting up next generation engine manufacturing
and testing facility in Tamil Nadu, which is expected to be completed by
January 2015. According to management this new facility will be used for
supplying engines to a new global passenger car manufacturer in India.


6) Force Motors has been assembling the Mercedes Benz engines and axles
for all its C,E,S and M class cars and SUVs built in India. Its Pune facility is
used for assembling and testing of Mercedes Benz engines for the passenger
cars made in India.

7) Promoters have been aggressively hiking their stake in the company. In last
six months they have raised their stake twice. They acquired 6.30 lacs of shares
of the company on February 17, 2014 and again 4.20 lacs shares on 31st of
July’2014. The total holding of promoter group now stands at 59.72% of the
paid up capital up from 51.75% as on 16th of February’2014.

8) Force Motors stands on firm balance sheet. It is net debt free, sitting on
cash and cash equivalents of around Rs. 219 crores as on 31st March’2014.
Capacity expansions and setting up of new plants have been primarily funded
through internal accruals. The company is sitting on cash per share of around
Rs. 150.

9) Revenue grew at a CAGR of around 21% in last 5 years, despite strong
headwinds in commercial vehicle space. Last two quarters has seen aremarkable turnaround particularly on profitability margins. Q1FY15 saw sales
revenue rise by 8.30% y-o-y and PAT by 35.94% y-o-y. Operating margins which
was a grey area for Force Motors has improved due to better blended
realization, stable input costs and higher operational efficiency.

10) The stock is available cheap at P/BV of 0.60x (ttm basis) and P/E of 8.95x
(ttm basis) at cmp of Rs. 563. Benefits of capacity expansions leading to
operating leverage along with higher operational efficiency on back drop of
improving economy is likely to play out in next three years.
11) Assuming the company is able to sustain its growth momentum picked up
in last two quarters, we expect Force Motors to deliver over 20% revenue
growth in FY’15. Based on annualized PAT margin of 3.73% (same as in FY’14);
its FY’15 EPS works out to be Rs 70.70. Valuing the company at P/E multiple
of 10x for FY’15 which is at good discount to industry average the target
stock price comes at Rs 707.
I recommend buy and accumulate on ‘Force Motors’ for a target price of Rs 707 in the short. Long term target 2500.  ( Safe investors can book 50% once doubles at 1400 and leave it cost free in your portfolio )
YE March (Rs. Crores) REVENUE EBITDA PAT EBITDA % PAT % EPS (Rs.) P/E (x)
FY12A 2,089.38 125.44 824.33 6.00% 39.45% 625.61 0.90x
FY13A 2,016.37 97.52 14.28 4.84% 0.71% 10.84 51.93x
FY14A 2,081.56 156.65 77.69 7.53% 3.73% 58.97 9.54x