Dolat Capital Market has given Buy recommendation for Sterling Tools with a target price of Rs. 274 in its research report issued on Feb 22, 2021

Dolat Capital Market’s research report on Sterling Tools

STRT reported strong operating performance in Q3FY21. Net revenue grew 31% YoY to Rs 1.1bn, led by recovery in demand across OEM segments. EBITDA was Rs 232mn (+67% YoY) with expanded margin (449bps YoY to 20.9%) due to a favorable product mix (increasing mix of CVs, cost control measures partly offset by higher RM prices. We expect margin to taper off in coming quarter due to sharp increase RM prices. STRT’s addition of Hyundai to its new customer list will lead to incremental revenues from FY22. This along with its long-term relationships with top OEMs, such as Maruti Suzuki, Tata, HMSI, Hero MotoCorp, M&M, Ashok Leyland, Fiat, and Daimler, we expect STRT to emerge as the key beneficiary upturn in Automotive volume (STL’s top-six accounts contribute nearly 65% to the total revenue. In addition, increasing contribution CVs (high margin business) and special fasteners is likely to boost revenue and profitability in the medium term. Overall utilization stands at an optimum level of 75-80% with a strong order book across segments. The benefit of operating leverage and cost control measures will be partially offset by increase in RM prices (+14% QoQ). STRT’s key raw material is mild steel wire coil/rod ranging between 5mm to 25mm diameter. In absence of any material capex requirement, we expect the company to generate strong FCF ahead (Rs 1.49bn over FY21-23).

Outlook

At the CMP, the stock is trading at 16x FY23E EPS. We recommend Buy rating, with TP of Rs 274 (based on 20x FY23E EPS).

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