Tuesday, February 21, 2012

Setco Automotive Bought by Morgan Stanley, Despite QoQ Dip in Q3

By Special Correspondent

Setco Automotive Ltd (BSE: 505075) counter on Friday witnessed a significant buy of 1 lakh shares by the FII, Morgan Stanley Asia (Singapore) Pte, which amounts to around 0.57% of the total shares in the company. This significant buy was undertaken by Morgan Stanley in BSE.

Setco Automotive is an Indian manufacturer of clutch products for the automotive sector and hydraulic products for the construction equipment sector. Mumbai headquartered Setco Auto’s other products include precision engineering components like complex and deep drawn pressings & forgings, as well as castings that are machined and heat treated.

Morgan Stanley Asia (Singapore) Pte is one of the six Indian FII accounts of the US based leading investment banking, securities, and financial services major, Morgan Stanley.

Setco Automotive Ltd was established in 1982, as a joint venture between businessman Harish Sheth’s family and Gujarat Government. The first factory was at Kalol, and Setco’s early customers for clutches included LMV players like Mahindra & Mahindra (M&M) and Telco (now Tata Motors). By the next 15 years, Setco was successful in getting clutch component supply orders from US & UK based companies.

A shifting of gears happened in 1999 when Setco entered into a technical collaboration with UK’s Lipe Clutch Division of Dana Corporation. By FY’06, Setco had acquired Lipe Clutch Division from Dana. The fiscal also saw Setco successfully raising 14.7% fresh equity from New Vernon Equity Pvt. Ltd. In the next fiscal, Setco acquired a US hydraulic products facility from Haldex AB Sweden through Setco’s French subsidiary, SANAI.

Morgan Stanley is a major foreign institutional investor in India holding significant stakes of 2%-6% in companies like, Lloyd Electric and Engineering, Amar Remedies, Strides Arcolab, Federal Bank, Money Matters Financial Services, Lakshmi Energy and Foods, Sobha Developers, Lakshmi Vilas Bank, Greenply Industries, Kalpataru Power Transmission, South Indian Bank, Kanoria Chemicals and Industries, Infotech Enterprises, NIIT Technologies, and Riddhi Siddhi Gluco Biols. Apart from these, Morgan Stanley holds 1%-2% in more than 10 other companies, and probably lower stakes in many other counters.

Setco is now a leading manufacturer of clutch products in India and abroad for heavy and medium commercial vehicles. With over 200 products, Setco addresses automotive markets across at least three continents. It has two manufacturing plants in India – the original one at Kalol and a second one at Sitarganj in Uttarakhand. Setco also runs two manufacturing facilities abroad – one in UK which doubles up as its R&D facility for clutches, and another in USA which also undertakes development of its hydraulic products.

On the fundamental side, Setco Automotive has been a good performer even during the difficult period since FY’08, with consolidated revenue growing by nearly 69%, and consolidated net profit growing by 147%, during these three years.

In the current fiscal year-to-date too, Setco’s standalone performance was good during the first two quarters, based on which the nine-monthly revenues are up by 23.51% and net profit is up by 46.81%.

Based on this above average fundamental performance, Setco stock had been soaring since the last two years from its two-year low of Rs. 77.55. Even in the current year-to-date, while most stocks had corrected, Setco had maintained its uptrend, rising from a 52-Week Low of Rs. 108 on 24th March in BSE to a 52-Week High of Rs. 190 on 15th November - marking a gain of 76% in the year-to-date and 145% in the last 24 months.

However, in Q3, while standalone revenue has grown both on a year-on-year and quarter-on-quarter basis, and standalone net profit has grown on a YoY basis, on a QoQ basis net profit has dipped by 36.32%.

Setco Automotive’s standalone and consolidated numbers are still not very divergent, with FY’11 standalone and consolidated revenues differing by only 17% and profits by less than 2%.

But on a closer look, the dip doesn’t appear as a serious fundamental challenge, as it was due to the bigger base formed in Q2 due to availing Rs. 6.43 crore as MAT Credit against this quarter’s Rs. 0.82 crore. In fact, EBITDA margins have improved by 1% QoQ to 17%, and EBITDA has grown by 16.50% QoQ.

This kind of steady performance seems to be the buy cue for Morgan Stanley. Setco Automotive is not the typical large-cap or mid-cap company that usually attracts the fancy of FIIs like Morgan Stanley. Setco is almost a small-cap stock having an equity base of only Rs. 17.64 crore and market capitalization of around Rs. 307 crore only.

But well-performing small cap stocks tend to give better market returns in the long-term, and it remains to be seen whether Morgan Stanley’s buy on Friday will act as a trigger for other FII & DII entries into Setco Automotive. As on December 31st, Setco Automotive fared poorly on institutional holding, with total institutional stake at just 4.11%, which is dominated by DIIs at 2.62% and the rest 1.49% with FIIs. Obviously, there is significant room for improvement in institutional holdings.

Major investors in Setco Automotive include New Vernon Private Equity at 12.44% stake, Reliance Capital Trustee Company at 2.59%, and Ares Diversified at 1.36%. Among them, Reliance Capital had sold off 0.24% stake in Q3.

Morgan Stanley’s buy was executed at Rs. 174 and the scrip had closed Friday’s trade at Rs. 173, up by 1.32% from previous close. The Indian market has reopened after Friday’s close only today, due to Monday being Maha Shivaratri, a holiday. Setco opened up at Rs. 175 in BSE today, and is now trading at Rs. 174.20, up by nearly 0.70% from previous close.

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