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Rico Auto Industries - To Buy or Sell a Tech Perspective

We present below the update for Rico Auto which will help you to arrive at a correct judicious decision whether to hold or buy fresh or sell existing stock. Do read comments below as we will be updating latest info on the company through the comments.

Significant improvement in operational performance on a sequential basis: After the restructuring exercise initiated in FY2015, Rico Auto Industries (Rico) is getting its operations back on track. This was evident from a 6% growth in its stand-alone revenues after nine quarters of decline. The company's consolidated operating profit margin (OPM) stood at 8.6% vis-à-vis 3.8% in the preceding quarter, where the management undertook a significant business re-structuring and corresponding costs. There was a 50% Y-o-Y fall in interest cost on the back of the balance sheet de-leveraging with proceeds from the FCC Rico stake sale. The adjusted net profit after tax (PAT) on a consolidated basis was at Rs4.9 crore.

First signs of turnaround in Q1FY2016 results: The management of Rico embarked on a large restructuring exercise in FY2015. The stake in joint venture FCC Rico was sold off to its partner and the cash flow from the deal was used to reduce the debt burden. Additionally, the loss-making entities were clubbed together in an investment subsidiary with the aim of including a strategic partner to turnaround these ventures. The financial turnaround reported by the company in Q1FY2016 was in line with our expectations. We expect the recovery to continue in FY2016 with focus on manufacturing efficiency and an improvement in OPM. The management is also striving to increase business with domestic car manufacturers and get double-digit top-line growth in FY2017.

Downgrade to Hold with PT revised to Rs58: The financial performance in Q1FY2016 re-confirms our belief of a business turnaround for Rico in FY2016. However, the stock has appreciated close to 30% in the past month and is currently factoring the improvement expected in the operations. Hence, we have downgraded the stock to Hold with a revised price target of Rs58 (earlier Rs48). The induction of a strategic partner in Rico's investment subsidiary is a key to watch out for and would create a further upside potential in the stock.

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