Stock Pointer

t prices is valued of Rs 115 per share. This provides much needed cushion to the stock. Over the next two ye

ZF Steering Gears (India) Ltd. CMP Rs 420 P/E 7.3x FY2012E  BUY

PRICE TARGET Rs 575/- (15 Months)

q Key Investment Highlights

Index Details Favourable Industry Outlook

The Indian CV industry, after facing a severe demand slowdown in the second half of
Sensex 2008-09, has bounced back strongly, reporting a strong demand recovery across most
????? segments. After posting a drop of 24% in the production of CV for the fiscal 2008-09, the
CV industry achieved an impressive 36% growth in 2009-10. The trend has even
continued in the first quarter of the current fiscal (Q1FY11) with growth coming in at a
Nifty robust 36.4% growth. Although the medium to longer term outlook remains strong given
????? the expectations of continued economic revival, the growth in volumes is likely to see
some moderation & is expected to be at around 19-20% for FY11 & 7-8% for FY12.

Small Cap Commands a significant market share

?????
ZF Steering commands a strong market share in the domestic CV space with nearly 45%
market share. Its only competitor with similar market share is Rane TRW Steering
Industry Systems Limited. The balance 10% of the CV Steering Gears market is met by imports
Auto Ancillary from China. Almost 65% of the Tata Motor’s requirement in the CV space is met by ZF
whereas in case of Ashok Leyland, it meets nearly 35% of its requirements. Further 100%
of the requirement for Eicher Motors & Man Force is met by ZF.
Scrip Details
Investment Value per share provides cushion

Besides its core business of manufacturing steering gears, ZF has significant portion of
Mkt Cap (Rs in crore)
381.1
income coming from its investments in liquid funds. The cash value per share of these
investments is valued at Rs 115 per share and provides significant cushion.

Better Capacity Utilization to enhance its operating margins

Book Value (Rs)
149.4
Currently ZF has installed capacity of 270,000 power steering gears & 180,000
mechanical steering gears. The capacity utilization in FY10 stood at 51% & 69% for
power & mechanical steering gears respectively. With the volume growth expected at
Eq Shares O/s (Cr)
24% & 15% for FY11 & FY12 respectively capacity utilization should improve leading to
0.9
higher operating margins of 20.4% in FY10 to 22.1% in FY12 from the current 18.7%.

Avg Vol
7,776

52 Week H/L
458 / 145

Dividend Yield (%)

-1- Thursday, 19th August, 2010

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
 2.0

Company Background
Face Value (Rs)
10.0
ZF Steering Gears India Limited, a Joint Venture with ZF Lenksysteme Gmbh is
a pioneer in manufacturing and supply of Power & Mechanical Steering Gears in India.
It has its plant located at village Vadu Budruk, Taluka-Shirur, 30 Km away from Pune on
Ahmednagar - Pune Highway. The present installed capacity stands at 180,000 units of
Mechanical Steering Gears and 270,000 units of Power Steering Gears.

BSE Code The company’s Product Range includes:

505163
Hydraulic Power Steering Gears for Heavy Commercial vehicles
Hydraulic Power Steering Gears for Medium and Light Commercial vehicles
NSE Code Power Steering Gears for SUV and off road vehicles
ZFSTEERING Worm and roller Mechanical Steering Gears for Tractor and Light Commercial
Vehicles
Power Rack and Pinion Steering System for Passenger Car.
Mechanical Rack and Pinion Steering System for One Toner Passenger and
Shareholding Pattern (30th June, 2010) Goods Carrier

Milestones & Achievements…..

Shareholders
% holding

Promoters
73.2

Indian Institutions
0.0

FII’s
0.0

Non Promoter Corporate

2.3

Public
24.5

Total
100.0

Source:

ZF Steering vs. Sensex Investment Arguments

Favourable Industry Outlook

The Indian Commercial Vehicle (CV) industry, after facing a severe demand slowdown in
the second half of 2008-09, has bounced back strongly, reporting a strong demand
recovery across most segments. After posting a drop of 24% in CV production for the
fiscal 2008-09, the CV industry achieved an impressive 36% growth in 2009-10. The trend
has even continued in the first quarter of the current fiscal (Q1FY11) reporting a robust
 20 300.0

Stock Pointer
250.0
15

CV Volume growth (%)

200.0

150.0
10
IIP (%)

36.4% growth. 100.0

5
The turnaround has been aided by a number of factors 50.0including improving economic
activity, favourable impact of Government aided stimulus package & an overall
improvement in the financing environment. In the recent -months the growth has also been
0 supported by some pre-buying ahead of changes in emission norms.

Jan-09

Jan-10
Jan-08

Mar-08

May-08
Jun-08
Jul-08

Oct-08

Dec-08

Feb-09
Mar-09

May-09
Jun-09
Jul-09

Oct-09
Nov-09
Dec-09

Feb-10
Mar-10

Jun-10
Feb-08

Nov-08

May-10
Sep-08

Sep-09
Apr-08

Apr-09
(50.0)
Aug-08

Aug-09

Apr-10
TrendKey Financials
in CV volumes vis-à-vis IIP growth
-5 (100.0)

20 300. 0
IIP CV Volume Growth
250. 0
15
200. 0

CV Volume growth (%)

With the cash value per share10 being as high 150. 0
as Rs 115 per share, this provides significant Y/E Mar
IIP (%)

100. 0
cushion to the shareholders thereby capping (Rs Crore)
the downside to a limited extent.
5 Net Revenues 50.0
EBIDTA
PAT -
• Better capacity utilization &
0 EPS
lower fuel cost to enhance EPS Growth (%) (5 0.0)
Jul- 09
Jul- 08

Dec-08

Dec-09
Nov-08
Jan-08

Jun-08

Oct-08

Jan-09

Jun-09

Oct-09

Jan-10
Feb-08
Mar-08

Sep-08

Sep-09

Nov-09

Feb-10
Mar-10
May-08

May-09

May-10
Jun-10
Apr-10
Feb-09
Mar-09
Aug-08

Aug-09
Apr-08

Apr-09

operating margins RONW (%)

-5 ROCE (%) (1 00.0 )
Currently ZF has installed capacity of 270,000 P/E (x)
power steering gears & 180,000 mechanical I IP
EV/EBIDTA C V V o lu(x)
m e G ro w t h
steering gears. The capacity utilization in FY10
FY10 stands at 51% & 69% for power & 216.1
mechanical steering gears respectively. 44.4
28.2
With the demand expected to remain strong 31.1
over the next two years, the company has 97.4
enough headroom for growth without incurring 22.4
any additional capex. It may be noted that ZF 27.4
had increased the installed capacity of its 13.5
Mechanical Steering Gears segment from 9.1
140,000 units to 180,000 units per annum in FY11E
FY10. 290.0
65.0
44.8
49.4
58.7
29.2
35.8
8.5
The above chart 6.0depicts that the growth in IIP has a direct correlation with the CV volume
growth. With FY12E
the IIP turning negative from Oct’08 onwards on account of global economic
turmoil, the CV segment too suffered a severe demand slowdown as shown in the above
350.0
chart. However from Aug’09 onwards, the CV segment has shown a remarkable volume
77.5
growth commensurate with the economic recovery as displayed by the surge in IIP
52.1
numbers.
57.4
16.3
-3- 27.2 Thursday, 19th August, 2010
32.8
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
7.3
5.1
 Although the medium to longer term outlook for the CV segment remains strong given the
C a p a c i t y U t i l i z a t i o n t o i m p r o v e expectations of continued economic revival along with faster infrastructure development,
the growth in volumes (which was higher on account of lower base effect) is likely to see
some moderation & is expected to be at around 19-20% for FY11 & around 7-8% for
5 0 0 ,0 0 0 8 3 .3 9 0 .0
FY12.
4 5 0 ,0 0 0 7 2 .2 8 0 .0
4 0 0 ,0 0 0 7 0 .0
5 8 .4
3 5 0 ,0 0 0
6 0 .0
3 0 0 ,0 0 0 4 5 .1
5 0 .0
Installed Capacity (Units)

Capacity Utilization (%)

2 5 0 ,0 0 0
4 0 .0
2 0 0 ,0 0 0 Commands a significant market share
3 0 .0
1 5 0 ,0 0 0
1 0 0 ,0 0 0 2 0 . 0 ZF Steering commands a strong 45% market share in the domestic CV space and its only
significant competitor (with similar market share) is Rane TRW Steering Systems Limited.
5 0 ,0 0 0 1 0 .0
The balance 10% of the CV Steering Gears market is met by imports from China. Almost
- - 65% of the Tata Motor’s requirement in the CV space is met by ZF whereas in case of
FY 09 FY 10 FY 11e FY 1 2e Ashok Leyland, it meets nearly 35% of its requirements. Further 100% of the requirement
for Eicher Motors & Man Force is met by ZF.
C a p a c it yV o lu m e C U (% )
As shown above, over the next two years, Strong growth from Tata Motors & Ashok Leyland augurs well for ZF
with the volume growth expected at 24% &
15% for FY11 & FY12 respectively, the Tata Motors & Ashok Leyland constitute more than 90% of the domestic CV market. With
both these players displaying strong growth in the CV space, this augurs well for ZF
capacity utilization is likely to improve from
which meets substantial requirements for steering gears from both these companies.
58.4% in FY10 to 83.3% in FY12e.
Tata Motors: Volume growth in FY10 & Q1FY11
Saving in power costs through setting up
of windmills

At the beginning of the last fiscal i.e. FY10, ZF

had two wind turbine machines aggregating
3 0 0, 0 0 0
1,700 KW. In FY10, the company successfully
installed & commissioned four wind turbines
of 1,250 KW at Satara, Maharashtra at2a0 0,cost 000
of Rs 24.3 crore.
1 0 0, 0 0 0
The company now has windmills of total
capacity of 6700 KW, which can generate -9.2
million units and would cater to approximately FY 09 FY 10 Q 1FY 10 Q 1FY 11
90% of the power requirement of the L CV 151 ,631 204 ,640 45 ,583 56 ,936
company’s plant. This would result into cost 113 ,743 169 ,202 26 ,633 43 ,250
MHCV
savings in terms of its power costs & thereby
enabling the company to enhance its overall M H CV L C V
margins in the coming years.

With the increase in capacity utilization on

the back of higher volume growth coupled
with the lower fuel costs, we expect the
operating margins to improve by 170 bps
from 20.4% in FY10 to 22.1% in FY12e.

• Regular introduction of new

products
 Stock Pointer
During the last fiscal, ZF had developed 8046
range of Power Steering gears for Heavy Ashok Leyland: Volume growth in FY10 & Q1FY11
Commercial Vehicle application for Tata
Motors, Ashok Leyland, Man Force Trucks,
Volvo Eicher & Mahindra Navistar. Under
70,000
mechanical steering gears segment, the
company developed Rack & Pinion steering 60,000
gears for Piaggio (after having successfully 50,000
developed rack and pinion steering gears for
40,000
Tata Motors Indica model).
30,000
Further with the company looking at inventing 20,000
new products / models, it has entered into a
10,000
Joint Venture with ZF Lenksysteme Gmbh
again with ZF India’s share at 26% while the -
FY 09 FY1 0 Q1 FY 10 Q1FY11
majority (74%) is being held by the German
MHCV - Trucks & Bu ses 54, 431 6 3,92 6 7,69 3 21 ,400
Parent. The JV Company ZF Lenksysteme
India Private Limited is however yet to
MHC V - Truc ks & Buses
engage in any major revenue earning activity.
Investment value per share provides cushion
• Reputed list of Clientele
Besides its core business of manufacturing steering gears, ZF has significant portion of
ZF is a leading supplier of mechanical & income coming from its investments into liquid funds. Currently ZF has investments into
power steering gears to most of the leading following liquid schemes, the market value of which at current NAV (as on 31st August,
commercial vehicle manufacturers in India. 2010) stands at Rs 128.9 crore.
Over the years, it has established a strong & a
Scheme Name
reputed list of clientele as enumerated below: NAV (Rs)
Units
Power Steering Gears Mkt Value of Investments
Mechanical Steering Gears

AIG World Gold (D)

• Tata Motors 13.44
• Ashok Leyland 1,955,990
• Force Motors 26,288,505.6
• Diamler
• Eicher Motors Birla SL FRF-LT-Inst (G)
• Swaraj Mazda 12.47
• Volvo India 4,997,951
• Man – Force Trucks 62,317,451.8
• M&M
Fidelity India Spl. Situations (D)
• Force Motors 16.57
• TAFE (Eicher Motors) 1,955,990
• Escorts 32,400,974.4
• International Tractors
• M&M
• New Holland Tractors HDFC Arbitrage-Ret (MD)
10.33
• Punjab Tractors 4,959,687
• SAME Tractors 51,218,687.7
• ACE
-5- Thursday, 19th August, 2010

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
 HDFC FRF-LT (G)
16.15
3,391,049
54,751,877.2

HDFC High Interest-STP (D)

10.61
6,561,618
69,588,583.5

HDFC Top 200 (D)

48.46
466,843
22,623,211.8

ICICI Pru Long Term Plan (G)

20.03
7,535,152
150,929,094.6

IDFC Hybrid PF-1 (G)

Q1FY11 Results Review: Splendid 10.12
5,000,000
Performance 50,593,000.0

Particulars
Q1FY11 Kotak Flexi Debt-Reg (G)
Q1FY10 14.60
Var (%) 12,481,290
182,175,660.7

CV Industry volume growth

Reliance Infrastructure-Ret (G)
11.33
2,000,000
22,669,200.0

Production Reliance Reg Savings-Debt-Inst (D)

163,061 12.28
103,743 8,887,697
57.2 109,124,032.5

Sales Reliance Reg Savings-Equity (D)

24.33
164,066
896,032
103,812 21,799,562.5
58.0

Sundaram BNPP Fin Serv Opp (G)

19.96
975,563
19,468,627.9

Sundaram Balanced Fund – Divd

 Stock Pointer
ZF Volume Growth 16.58
634,095
10,510,758.7

Sundaram BNPP PSU Opp (D)

11.36
Power Steering Gears 1,975,309
38,898 22,441,880.6
21,464
81.2
Sundaram BNPP S.M.I.L.E (D)
13.38
Rack & Pinion Power Steering Gears 1,000,000
4,405 13,379,800.0
3,700
19.1
Sundaram BNPP Select Mid cap (D)
19.19
1,191,838
Mechanical Steering Gear 22,865,650.4
34,204
27,539
24.2 Templeton India Income (G)
32.19
10,693,786
Total Volumes 344,275,746.5
77,507
52,703
Total Market Value (In Rs)
47.1

1,289,422,306.4

Computation of Cash per share

Particulars
Rs in crore
Financial Snapshot

Market Value of Investments

128.9

Net Sales Cash lying in Balance Sheet

64.7 3.8
38.3
68.8
Less: Loan Liability
28.4
EBIDTA
14.9 Liquid cash available
6.6 104.4
125.6

-7- Thursday, 19th August, 2010

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
 Cash value per share
115.0
EBIDTA (%)
23.1
17.2
590 bps

Other Income
4.3
1.4
218.1

Depreciation
3.3
1.8
84.7

Interest
0.1
0.0
16.7

PBT
15.9
6.2
158.7

Tax
4.1
1.9
120.3

PAT
11.8
4.3
175.6

EPS
13.0
4.7
175.6

Industry Review:

During the quarter ended June 2010, the

overall sale (domestic + exports) of CV
segment registered a growth of 58% as
 Stock Pointer
compared to the same period last year.
Medium & Heavy Commercial Vehicles
(M&HCVs) registered a growth of 81% & Light
Commercial Vehicles (LCV) grew at 42%.
Passenger cars too registered a 29% jump
over the corresponding period.

ZF Results Review:

On the back of strong industry performance,

ZF too posted 68.8% growth in its net
revenues on the back of strong volume growth
of 47%. Operating profit (EBIDTA) too was up
125.6% at Rs 14.9 crore as against Rs 6.6
crore registered in Q1FY10. The surge in
EBIDTA was attributed to impressive volume
growth of 47%, better realization (up nearly
15%) & savings in power & other costs by 170
bps.

PAT consecutively was up 175.6% at Rs 11.8

crore on the back of strong operational
performance & higher other income which
was at Rs 4.3 crore as against Rs 1.4 crore,
an increase of 218%. EPS for the quarter
stood at Rs 13 as compared to Rs 4.7
registered in the corresponding quarter of the
previous year.

Financial Outlook

With the demand expected to remain strong

for the steering gears in the CV segment, ZF
is expected to post a decent volume growth of
24% & 15% in FY11 & FY12 respectively.
Apart from the positive business outlook, ZF
also has significant liquid investments in its
balance sheet which at the current prices is
valued of Rs 115 per share. This provides
much needed cushion to the stock.

Over the next two years, on the back of better

capacity utilization & margin accretion (by 170
basis points from 20.4% in FY10 to 22.1% in
FY12), ZF is expected to exhibit a CAGR of
27% & 36% in its revenues & profitability
respectively. EPS for FY11 & FY12 is pegged
at Rs 49.4 & Rs 57.4 respectively.

-9- Thursday, 19th August, 2010

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Key Concerns

• The Steering Gears industry does

face competition from Chinese
imports. Nearly 10% of the demand
for steering gears in currently met by
Chinese imports on account of its
better pricing terms. However with
Yuan expected to appreciate against
the dollar in future, the price
competitiveness of the Chinese
manufacturers is likely to decline vis-
à-vis Indian manufacturers.

• Higher than anticipated input costs &

customer’s demand for price
reductions may dent the margins of
the company going forward which
could have an adverse impact on the
financials of the company.

• Adverse global events may again

create uncertainty in the economic
environment, thereby impacting the
demand the company’s products.

Valuation & Recommendation

Considering strong demand outlook for the

steering gears especially for the CV segment
coupled with the underlying value of liquid
investments & attractive dividend yield of
above 2%, we maintain a positive outlook on
the company.
 Stock Pointer
At CMP of Rs 420, ZF is attractively valued at
10x & 7x its FY11e & FY12e estimated
earnings of Rs 49.4 & Rs 57.4 respectively.
We recommend a BUY on the stock with a
price target of Rs 575, an upside of 37% for a
time horizon of 12 to 15 months.

One Year Forward Rolling Bands

P /E C h a r t

700
600 12X
500
9X
400
300 6X
200
3X
100
0
Jul-07

Jul-08

Jul-09

Jul-10
Nov-07

Nov-08

Nov-09
Jan-08

Jan-09

Jan-10
Mar-10
Mar-07

Mar-08

Mar-09
Sep-07

Sep-08

Sep-09
May-07

May-08

May-09

May-10

E V /E B ID T A C h a r t

700
600 8X
500
6X
400
300 4X
200
2X
100
0
Jul-07

Jul-08

Jul-10
Jul-09
Jan-08

Jan-09

Jan-10
Mar-07

Mar-08

Mar-09

Mar-10
Nov-07

Nov-08

Nov-09
May-08
May-07

May-09

Sep-09

May-10
Sep-07

Sep-08

Exhibit 01: Financials and Projections

Profit & Loss Statement Key Ratios

- 11 - Thursday, 19th August, 2010

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Y/E March, Fig in Rs. Cr Y/E March, Fig in Rs. Cr
FY2010 FY2010
FY2011e FY2011e
FY2012e FY2012e

Net Sales Per Share Data (Rs)

216.1
290.0
350.0

% Chg. EPS
30.1 31.1
34.2 49.4
20.7 57.4

Total Expenditure Cash EPS

172.9 39.5
225.0 59.3
272.5 69.5

% Chg. DPS
23.6 8.5
30.1 9.0
21.1
10.0

EBDITA Book Value

44.4 149.4
65.0 188.2
77.5 233.9

EBDITA Margin % Capital, Liquidity, Returns Ratio

20.4
22.4
22.1

Other Income Debt / Equity (x)

4.6 0.2
10.0 0.2
8.0 0.2

PBDIT Current Ratio (x)

49.0 1.8
75.0 2.3
85.5 2.4

Depreciation ROE (%)

7.6 22.4
9.0 29.2
11.0 27.2
 Stock Pointer

Interest ROCE (%)

0.1 27.4
0.2 35.8
0.4 32.8

PBT Dividend Yield (%)

41.3 2.0
65.8 2.1
74.1 2.4

Tax Provisions Valuation Ratio (x)

13.1
21.0
22.0

P/E
Reported PAT
13.5
28.2
8.5
44.8
7.3
52.1

P/BV
PAT Margin (%) 2.8
13.0 2.2
15.4 1.8
14.9

EV/Sales
1.9
1.4
1.1

EV/EBIDTA
9.1
6.0
5.1

Efficiency Ratio (x)

Raw Materials / Sales (%)
65.4
64.8
65.9

Inventory (days)
Employee Exp / Sales (%) 69
8.0 45
7.9 45
7.4

Debtors (days)
- 13 - Thursday, 19th August, 2010

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Other Mfr. Exp / Sales (%) 31
6.2 31
4.8 35
4.6

Creditors (days)
Tax Rate (%) 41
31.6 48
31.9 50
30.0

Balance Sheet Cash Flow Statement

 Stock Pointer
Y/E March, Fig in Rs. Cr Y/E March, Fig in Rs. Cr
FY2010e FY2010e
FY2011e FY2011e
FY2012e FY2012e

Share Capital Profit After Tax

9.1 28.2
9.1 44.8
9.1 52.1

Reserves & Surplus Depreciation & W/o

126.5 7.6
161.7 9.0
203.2 11.0

Minority Interest Working Capital Changes

0.0 10.2
0.0 -6.2
0.0 -13.0

Total Loans Others

28.4 -2.5
34.0 0.1
37.0 0.0

Deferred Tax Liability Operating Cash Flow

0.0 43.5
0.0 47.6
0.0 50.1

Total Liabilities Capital Expenditure

164.0 -26.7
204.8 -15.6
249.3 -20.0

Change in Investment
-30.4
-9.6
-20.0

Gross Block Others

139.4 0.0
155.0 0.0
175.0 0.0

Less: Acc. Depreciation Cash Flow from Investing

89.0 -57.1
- 15 - Thursday, 19th August, 2010

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Ventura Securities Limited

Corporate Office: C-112/116, Bldg No. 1, Kailash Industrial Complex, Park Site, Vikhroli (W), Mumbai – 400079

This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no
responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their
articles. Neither Ventura Securities Limited nor any of the contributors accepts any liability arising out of the above information/articles. Reproduction in whole or
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