Sundaram Clayton

Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,550
Current market price: Rs1,178

Br(e)aking new ground




Key points

Sundaram Clayton Ltd (SCL) would benefit from the buoyancy in the country's commercial vehicle (CV) industry. The shift from hydraulic brakes to air brakes expected in the CV industry augurs well for SCL.
WABCO, holding a 39.17% stake in SCL, is scouting for a low-cost producer of brakes in India and SCL would be the ideal choice. We expect SCL to become a major sourcing hub for WABCO and meet its global requirements of brakes and machined castings. Such an arrangement would increase SCL's business opportunities significantly.


We believe that the much-awaited demerger of SCL is about to take place. A demerger would enhance the business focus of both the divisions and lead to the unlocking of the value of the company's investments in group companies.
SCL has introduced anti-lock braking systems (ABSs) in India. It would get a boost from the government's move to make the use of ABS in CVs mandatory from January 2007. Also, the margins in ABSs are higher than that in the conventional braking systems which should further boost the company's margins.
The value of SCL's total investment in group companies works out to Rs1,930 per share. While computing SCL's value, we have assumed a 75% discount to the company's total investment. After adjusting for this, the SCL stock is currently trading at around 8.8x its stand-alone FY2008E earnings and around 7.1x its stand-alone FY2008E earnings before interest, depreciation, tax and amortisation (EBIDTA). We believe the valuations are attractive and hence recommend a Buy on SCL with a one-year price target of Rs1,550.