STOCK IDEAS- Dynamatic Technologies Limited

Dynamatic Technologies Limited

BSE Code: 505242

NSE Code: DYNAMATECH

Dynamatic Technologies Limited (DTL) is the largest producer of hydraulic gear pumps in Asia and one of the top five worldwide. With state-of-the-art manufacturing facilities, and incorporation of the latest process technologies in precision engineering, the company has diversified into a number of related areas like Aerospace and the Automotive Components sector, thus creating a unique, vertically integrated manufacturing structure.

Business:

Incorporated in the year 1973, DTL has manufacturing plants at Chennai, Bangalore and Swindon. DTL produces engineered products for automotive, aerospace, agricultural and construction equipment industries under different business segments.

Hydraulics Division:

DTL enjoys a market share of more than 80% in domestic market in this segment which contributes to around 45% to its annual sales revenues. Under this segment, DTL manufactures a range of products which include hydraulic gear pumps; hydraulic valves; and custom tailored hydraulic solutions, including hydraulic pumping units, marine power packs, aircraft ground support systems, and turnkey industrial installations. During last year, DTL acquired Swindon unit of UK based Sauer Danfoss Limited into manufacturing of hydraulic gears helping it to increase its market reach in North America and Europe.

Keeping in mind the ongoing infrastructure development, DTL has specially developed an entire range of cast-iron body high pressure gear pumps for heavy duty applications which will help to generate higher margins. Also DTL has ventured into entirely new area of business of manufacturing and supply of ‘Total Tractor Hydraulic Systems’ (Hitch lifts) to new generation tractors which would fetch considerably high sales.

DTL supplies to major OEMS like John Deere, Case New Holland, JCB, Caterpillar, M&M, Eicher Tractors, Same, Escorts Limited, Bajaj Tempo Limited, L&T etc.

Metallurgy Division: The Dynametal division contributes to around 12% to sales revenues and produces high quality Non-Ferrous Alloy and Castings. This divsion located in Chennai serves as backward integration for raw material for aerospace, automotive and industrial applications.

Automotive division: JKM Automotive, a division of DTL (contributing 45% to total sales revenues) produces high quality ferrous and non-ferrous critical engine and transmission components for the burgeoning global automobile industry. Located in Chennai, it is a single source to global automotive OEMs for critical components in three product segments: highway, off highway and technology.

In highway segment, it caters to over 40% of Indian passenger car market being sole supplier to Hyundai for critical parts. Its customers include Hyundai, Tata Motors & Fiat in domestic market and Ford, Nissan, Renault, Jaguar in the exports market.

For off-highway segment, it caters to oil & water pumps for industrial majors like Cummins & John Deere. In technology segment, DTL is developing high value turbo charger compressor housings for Honeywell Garett – volume for which is expected to reach 4 million units in next 2-3 years from current production of 1 million units.

Aerospace Division:

Dynamatic Aerospace - a division of DTL, is a pioneer and a recognized leader in the Indian Private Sector for the development of complex aerostructures. Instituted in 1995, DTL is the only AS9100 certified company in India producing exacting airframe structures and precision aerospace components. Products include the vertical fins, horizontal stabilizers, ventral fins, canards, slats and air brakes for the Sukhoi 30MKI fighter bomber; Ailerons and Wing Flaps for the HJT-36 Intermediate Jet Trainer and Wing and Rear Fuselage of the LAKSHYA, India’s Pilotless Target Aircraft.

This division has closely partnered national agencies like Ministry of Defense, HAL, DRDO and other defence establishments on key projects. The company has signed MOUs with leading aerospace players like Northrop Grumman, Spirit Aerospace and Cobham during last year.

DTL has already received confirmed orders from Sukhoi 30MKI for its fighter planes. Recently DTL has entered into an agreement with Spirit Aerospace for manufacturing of flap track beams for airbus A320 family. DTL is also looking out for acquisition of aerospace components manufacturing unit in UK, to further strengthen its presence in aerospace segment. Going forward, this segment would be major growth driver and would lead to annual revenues of around Rs. 80 crores by FY11.

Investment rationale:

DTL enjoys market leadership position in hydraulic gear pumps segment and with the acquisition of Swindon unit last year, its revenues are set to increase considerably on the back of huge infrastructure requirement in India. In automotive segment, DTL would benefit from increased capacity production of passenger cars and growth in high margin off highway and technology products. DTL’s technical capabilities right from designing to offering product solutions make it sole supplier to several companies. Also in aerospace segment, Indian defence offset clause mandating 30% offset provisions for all defense purchases would benefit DTL. Its recent tie ups and orders from Aerospace segment would ensure robust margin growth.

Concerns:

DTL being in automotive segment faces competition from low cost manufacturers but it has differentiated itself by offering value added products. DTL faces margin pressures due to hike in raw material costs but it has been able to shield itself by pursuing value engineering and by entering into price indexed contracts.

Valuations:

We believe DTL with its self sufficient integrated business model, planned acquisitions and capacity expansion is set to show robust growth in aerospace, automobile and hydraulics segments. Also margins are set to improve drastically with focus on offering value added products and huge orders in aerospace segment. DTL revenues are expected to grow at CAGR of 42% over FY08A-FY10E and net profit at CAGR of 80% over FY08A-10E. At CMP of Rs 1069, DTL trades at a P/E of 21.47x its FY08 earnings and at 13.81x & 7.96x its FY09E and FY10E earnings respectively. Considering the strong margin growth, DTL looks attractive at current levels from long term perspective.

SALES AND PROFIT PROJECTIONS
		Annual	Annual	Annual
in Rs. Crore	Q4 FY08	FY08	FY09(E)	FY10(E)
Net sales	104.83	355.96	516.00	721.00
OP	16.09	46.61	90.30	151.41
PAT	8.38	20.92	42.57	73.90
Capital	4.81	4.81	5.50	5.50
EPS (Rs.)	19.94	49.78	77.40	134.37

PRICE AND VALUE RATIOS
Price	1069.00	Date	4/7/2008
PE	21.47	PB	7.94
Book value per share	134.70	EV	653.21
EV/EBIDTA	14.01	Mcap	514.26

SHAREHOLDING PATTERN
Share holding	Mar 2008
Promoter owned	62.59
Public owned	24.15
FIIs owned	9.3
Others owned	3.96