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Wednesday 17 October 2012

Stock Idea: CEBBCO

CEBBCO looks to be a good medium-term (2-3 years) growth story. Details below.

Describe the business in a few sentences. What does the company do? Who are its primary customers?

CEBBCO is a commercial vehicle “body-builder”!!
It is the largest player in the Fully Built Vehicles and manufactures Fully Built Vehicles, Wagons, EMU’s, Refurbishment and Components for Railways, Structurals for Electrostatic Precipitators (ESP) and Boilers for power plants.

Tata Motors makes up for 53% of its revenues. Other than Tata Motors, Ashok Leyland, Eicher Motors, Man Force Motors, Indian Railways, Defence Factory Jabalpur, L&T and BHEL are major clients.
Is the sector that the company is in growing? i.e. Is there a headwind or a tailwind present?

1. Projected FBV industry growth from about Rs 1100 cr in 2011-12 to Rs 8000 cr
by 2016-17 - a 6.5x growth.
2. The stated policy of the OEM’s is to convert to 100% FBV by 2017.
3. Bank finance for truck bodies and quality assurance from the OEMs are key demand triggers for truck buyers to shift towards FBVs from buying truck chassis.
4. Within medium and heavy CVs, heavier truck sales are gaining momentum which should also aid a shift towards FBVs since OEM-fitted FBVs are better designed.
5. The Government, in an effort to encourage FBV sales, has placed a 2% excise duty differential for buyers who buy FBV as against chassis.
What is the current market share of the company? Can the market share be increased?

CEBBCO has about 30%-35% of the organized market. CEBBCO is one of the preferred vendors for most of the OEMs and is looking to increase market share to 40%. Beyond that it will be very difficult.

The business does not seem to have any sustainable competitive advantage (moat) and has low entry barriers. Number of companies in the unorganized sector is fairly large.
Who are the primary competitors? Why is this company a better investment than them?

Competition from the organized segment remains limited and includes players like multinational Hyva and local player Utkal.
What is the owners’ and managements’ stake in the company?

Management own 55% of the stock.
Are management's salaries too high?

Father-son duo together earn 2.1 cr on a PAT of 40.8 cr implying 5.25%. This seems to be on the higher side, especially considering that they own 43% of the stock between the two of them.

How much debt is there in the balance sheet? Is it increasing, decreasing or remaining constant?

D/E is 0.43. Debt has gone up along with equity and reserves.
Is the debt level normal for the sector the company is operating in (i.e. how much is the debt-equity ratio of its nearest competitors)?

Debt level is not excessive so not much of a concern here.
How much cash is there on the BS? What is the cash per share?

Cash & Investments are negligible.
Is the Networth rising over the years?

Networth has increased significantly. From 50.17 cr in 2008 to 258.09 cr in 2012.
Has the company increased its sale, net profit, operating margins and net margins over the years?

Compounded Sales Growth
5 Years: 34.01%
3 Years: 22.05%
1 Year:   116%

Compounded Profit Growth
5 Years: 18.01%
3 Years: -1.54%
1 Year: 617%
Has the company increased it RoE, RoCE, (RoA for financial companies) over the years or atleast maintained it? How does it compare to its competitors?

RoCE (%)

FY11 was a difficult year with multiple problems. The company has a checkered history of PAT growth.
Is the company operating cashflow positive? Is the operating – investment cashflow positive? Is the company net free cashflow positive? Is the Operating cash flow higher than earnings per share?

Net Cashflow (Operating – Investing) is constantly negative for the last 3 years.
Does the company pay tax, dividends every year?

The company has been a regular tax player. It will be paying its maiden dividend this year.
Is the Free Cash Flow per share higher than dividends paid?

Company is negative cash flow for the last 3 years
Is the business capital intensive?

RoA is close to 46% thus it is not very capital intensive.

What is the expected valuation?

I am expecting a EPS growth of 30%+ for the next 2-3 years. With that an EPS of 12-13 is possible by FY14. A PE ratio of 15 can drive the price to 180.
Is the PE ratio below 15? Is the PEG above 1.0?

PE is currently 10.52 (CMP=100)
Why do you think the stock is under priced? Is there an expectation to double the investment in 2-3 year timeframe? If not, why bother?

Growth is expected to be very strong in the next 3-4 years.

Disclosure: I am interested in CEBBCO and my views are likely to be biased. Please do your own due diligence before investing.


  1. I have few questions on CEBBCO.
    a)It is issuing shares, which is diluting existing shareholder value. Why is diluting shares???
    b)Debtors have increased from 30cr to 104cr (source:moneycontrol.com).Sales have grown to about 100% but where as Debtors have increased by 250%. looks the company is dying to sell the product.
    Will be avoiding this company, as it looks to me this company is not shareholder friendly.

  2. Hi Akash,

    1) It has issued shares during its IPO in 2010. Nothing after that.

    2) I don't see the company having any problems in getting orders or getting paid. In fact it is operating nearly at 100% capacity.

    I suggest you go through the last 2 available annual reports to get a better feel of the company and the opportunity size that it has.


  3. Hi Abhishek

    I see lot of risks in this company and it may not be wise just to look at growth. Let's take example of CFL opportunity which was available few years back. Lot of companies expanded their capacities in view of high growth opportunities. Growth did materialize and CFL operators grew at more than 25%+ for last few years but most of them are incurring losses because of pricing pressure and overcapacity in the industry. We can see many such examples where company did not have any moat but had lots of growth opportunities.

    When company has EBITDA margin of 6-8% (2005-09, I am ignoring 10-12 which looks pretty high compared to historical range) and raw material cost constitute more than 70% of sales, even 2-3% hike in raw material cost which company is not able to pass on will impact margins quite adversely. These companies will be competing only on price and if growth really materilize at 20-30%+ lots of capacity might be expected and pricing pressure cannot be ruled out. I doubt in such a scenario despite growth materializing company might not command very high multiple in the market.

  4. Hi Anil,

    I agree with you to some degree. This is a low margin business. Why else do you think the CV manufacturers are not doing it themselves?

    The contracts that CEBBCO has with the OEMs are mostly pass through in nature with respect to raw material cost escalation.

    There are not too many organized players in India. Sutlej, Utkal and Hyva are the major ones. Also, it will not be easy for a new entrant to get into a deal with the OEMs since it will be their brand name at stake with a FBV. ie, customers will blame Tata Motors if the quality of the body is not good, so they may not be very willing to go to some new vendor to get a miniscule cost benefit.

    You have to look at the structural changes that is taking place in the industry. They are all pointing in the direction of moving towards a FBV oriented CV production.

    Finally, this is not a "fill-it-shut-it-forget-it" kind of investment. It is more of a medium term growth story to me. If I get Rs. 160-180 within the next 18 months, I would probably take my profits.

  5. Hi Abhi, are still strong on CEBBCO? your thoughts on cebbco FY14 performance is appreciated.

    1. Hi Ramesh

      I had earlier sold out CEBBCO and booked my losses. My experience has been that any company which has such a steep price correction finds it very difficult to regain investor confidence soon. It may take years for it to rebuild the lost confidence. So, better to take losses, get out and invest in some other stock which has better potential of appreciation.