We are pleased to inform you that our Hidden Gem stock of August 2016 - Sterling Tools Ltd (BSE Code: 530759, NSE Code: STERTOOLS) which was released on 18th Sept'16 is giving as on date returns of 210% to our Hidden Gems members. Our team suggested Buy on Sterling Tools Ltd at price of Rs. 149.27 (stock split adjusted price, actual recommended price was Rs. 746.35) on 18 Sept 2016 with a target price of Rs. 280 (stock split adjusted target price, actual target price was Rs. 1400). We are glad to inform our readers that stock has already achieved its target price in May this year and we suggested our members to continue to hold the stock.
Sterling Tools has made its 52 week high of Rs. 478 today and currently trading at Rs. 463 giving absolute returns of 210% to our Hidden Gems members in period of 15 months.
In Sept'17 quarter, net profit of Sterling Tools rose 61.72% to Rs 14.70 crore against Rs 9.09 crore during the previous quarter ended September 2016. Sales rose 21.31% to Rs 115.79 crore in the quarter ended September 2017 as against Rs 95.45 crore during the previous quarter ended September 2016.
Below is the summary of Sterling Tools Ltd shared by our team under Hidden Gem stock of Aug'16 released on 18th September 2016.
Sterling Tools Ltd was established in 1979 and is engaged in the manufacturing and marketing of high tensile cold forged fasteners. Over the years, the company has become one of the leading OEM suppliers in India with a client base that spans leading automotive companies in India, Europe and USA.
With the expertise of over two decades, company’s manufacturing facility today includes state-of-the-art annealing, cold forging, inline rolling, heat treatment, finishing/coating, CNC turning, centre less grinding, circular thread rolling and other secondary operations. In addition, Sterling Tools also introduced a complete range of multi station headers with automatic motorised adjustment systems that facilitate smooth and fast job changes
3. Financial Performance:
We expect the company to deliver robust revenue growth in coming quarters with rising sales of 2 wheelers and commercial vehicles in India.
5. Key Concerns & Risks:
i) Any increase in input costs (i.e steel, iron etc) can negatively impact the operating margins of the company.
ii) As the company’s business is directly linked to automobile sector, downturn in automobile sector can affect business growth and profitability.
i) The Indian auto ancillary industry is well poised to achieve strong growth in the coming years considering the overall improvement in demand in the domestic and export markets with Indian automobile OEMs expanding presence in new geographical regions. Higher urban spending, lower commodity and oil prices, pay commission wage hikes, lower inflation and interest rates , better monsoon (which will stimulate rural demand) will lead to an overall improvement in 2 wheelers and passenger vehicles volumes in India.
ii) Sterling Tools is one of the top 3 manufactures of fasteners in India and become a major supplier to the leaders in the automobile industry. The company caters to varied and customized demand of clients. It is a largest supplier of HT (high tensile) fasteners to Honda and second-largest supplier to Maruti Suzuki and Tata Motors. Company’s other customers include Ashok Leyland, Daimler, FIAT, Hero Motocorp, Mahindra & Mahindra, Volvo, Eicher, TAFE and General Motors.
iii) Sterling Tools is a major supplier to Honda with almost 25% of revenues from the company. Honda motors has doubled its market share to 27% in the last four years and continue to gain further ground in the two wheeler market in India. Honda has already launched 5 new products in 2016 and expects to register strong growth with upward sales trend during the year. We believe Sterling Tools revenue will increase in line with increasing sales of Honda two wheelers. Moreover, as company supplies to Ashok Leyland and Tata Motors as well, it will be the direct beneficiary with expected double digit growth in M&HCV segment going forward.
iv) Sterling Tools has now become a specialty manufacturer of engine & special fasteners and supplier of special fasteners to leading auto companies worldwide. The company has transformed itself from a manufacturer to a value chain partner on account of continuous up gradation and enhancement of process capabilities.
v) Company has registered sales CAGR of 9.35% and profit CAGR of 41.03% with ROE of 19.76%. Debt to Equity ratio is improved from 1.14% to 0.5% in last 5 years resulting in higher net profit margins. Working capital cycle has reduced from 84 days in FY12 to 50 Days in FY16. We expect company to continue reporting improvement in its ROE and ROCE with improvement in profitability with strong sales and better working capital management.
vi) To push replacement market sales, the company is focusing on increasing dealerships for its products. Currently, the company has more than 60 dealers and continuously increasing its penetration to new geographies across country to reach out to more no. the customers to further strengthen its position in replacement market.
vii) As of Jun’16, promoter’s shareholding in the company is at 70.15% without any change in holding since last 2 years. However, promoters have increased their stake by 0.96% in last 5 years, from 69.19% in Sep’11 to 70.15% in Jun’14. The company has not pledged any shares, Institution shareholding in the company is negligible at 0.42%.
viii) Management has rewarded shareholders by paying regular dividend since last 9 years. The company has paid total dividend of Rs. 15 for FY15-16 and dividend yield at current share price is 2%. Dividend is increased from Rs. 5 to Rs. 15 during last 5 years with healthy dividend payout of 26%.
ix) As per our estimates, Sterling Tools can deliver PAT of 43.60 crores for full financial year 2017-18, annualized EPS of Rs 63.74 with forward P/E ratio of 11.7X for FY17-18. Company’s valuation looks attractive considering strong balance sheet with improving financials, better return ratios and robust growth outlook of fastener industry with significant pick up expected in automobiles production in the country.
x) On equity of Rs. 6.84 crore, the estimated annualized EPS for FY17-18 works out to Rs. 63.74 and the Book Value per share is Rs. 208.67. At current market price of Rs. 746.35, stock price to book value is 3.58.
- 70% at current market price of 746.35
- 30% at price range of 520 - 570 (in case of correction in stock price in near term)
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