Fundamental Analysis of Banco Products: Automobile and auto-components makers recorded all-time high sales in the recent financial year 2022-23 as the demand recovered after the Covid-19 led-pandemic.
Furthermore, the industry underwent various developments with the rise of EVs, changes in emission norms, and more. Amidst all this, are there any attractive investment opportunities?
We’ll conduct a fundamental analysis of Banco Products, one such auto-ancillary company.
Fundamental Analysis of Banco Products
We’ll begin our study of the company by reading about the business and the scale of its operations. Next, we’ll give a brief read to the industry landscape followed by the financials of the stock. In the end, a highlight of the future plans and a summary conclude the article.
Banco Products (India) was set up more than 60 years ago in 1961. Over the years, it has grown its product portfolio, geographical presence and manufacturing capabilities to become a leading automotive components manufacturer.
As an auto-ancillary company, Banco produces two types of products: engine cooling systems and sealing systems. Its portfolio of products includes radiators, charge air coolers, oil coolers, fuel coolers, battery coolers, fan motor assembly, fan shrouds, graphite composite gaskets, rubber cork gaskets, edge moulded gaskets, multi-layered steel, etc.
Its products are used by original equipment manufacturers (OEMs) of passenger cars, two/three wheelers, commercial vehicles (light, medium & heavy) construction and material handling equipment, railway locomotives, and more in India and abroad.
The auto-components maker caters to customers in the USA and European countries through three production facilities and a large warehousing & distribution network of 11 sites. It has become a preferred supplier of renowned players such as Cummins, Tata Same Deutz, Mahindra and more for its modules, accessories and engine cooling products.
The company earns the majority of its revenues from customers from abroad. For instance, its international operations fetched 58.5% of the total revenue in FY23. Exports of products generated a 15.0% revenue share. The balance of 26.5% came from sales within the country.
We got a good understanding of the business of the auto components maker. Let us now move forward to learn about the global automotive industry landscape for our fundamental analysis of Banco Products.
The auto ancillary sector tracks the growth of the automobile industry as it derives its demand from the latter. Thus, for our industry overview, we’ll learn about the global automobile industry landscape.
In the last few years, the sector underwent degrowth as multiple factors impacted the demand and supply of passenger and commercial vehicles. While the general economic slowdown and the Covid-19 induced-pandemic hurt demand, the shortage of critical components and supply chain disruptions resulted in irregular production.
The manufacturing of light vehicles or LV declined by 17.39% to 76 million units in FY22 from 92 million units in FY19. Similarly, medium and heavy-duty or M&HD trucks production fell slightly from 2.5 million in FY19 to 2.2 million units in FY22.
Various industry groups have forecasted a gradual volume recovery in the manufacturing of LV and M&HD to 94 million units and 2.6 million units by FY 2025-26. Furthermore, the EV sub-segment is expected to grow at a rate faster than the industry rate in the coming fiscals.
However, FY23 was an impressive year for the automotive industry as the industry experienced good growth across various sub-segments. Overall, going forward a steady demand, normalization in raw material costs and easing of chip shortages will support margins off the OEMs and auto ancillary companies.
Banco Products – Financials
Revenue and Net Profit Growth
The revenues of Banco Products have increased at a CAGR of 10.5% from Rs 1,567 crore in FY19 to Rs 2,332 crore in FY23. During the period, the net profits grew at a faster-annualized rate of 29.7% from Rs 83 crore to Rs 236 crore.
The table below highlights the operating revenue and net profit growth of Banco Products (India) for the previous five financial years.
|Fiscal Year||Operating Revenue||Net Profit|
(figures in Rs Cr except for CAGR)
But how is it that net profits grew faster than operating revenue? Let us read more on this in the next section on profit margins of our fundamental analysis of Banco Products.
Being a manufacturing company, Banco enjoys operating leverage. Thus, during our study period, the sales of the company grew with a corresponding increase in realization. As a result, the operating profit margin expanded from 10% in FY19 to 13.9% in FY23. Consequently, the net profit margin also improved from only 4.4% in FY19 to Rs 10.1%.
The figures below represent the operating profit margin and net profit margin of Banco Products for the previous five fiscals.
|Fiscal Year||Operating Profit Margin||Net Profit Margin|
(figures in %)
We learnt so far that Banco’s sales and profits grew in the past five fiscals. Let us see how it affected profitability by studying the return ratios of the automotive components maker.
During our study period, the RoCE and RoE increased from 17.2% and 8.3% in FY19 to 26.2% and 23.5% in FY23 on an impressive note. The higher return ratios in the recent fiscals tell us about the high profitability of the business of Banco Products.
The table below showcases how the two return ratios: RoCE of RoE of Banco Products have behaved in the past few years.
(figures in %)
The debt-to-equity ratio and interest coverage ratio stood at 0.3 and 30.2 times in FY23 respectively. The debt/equity ratio marginally increased in the recent fiscal. However, with interest coverage of 30 times, Banco Products is a fundamentally strong stock.
The table below presents the debt-to-equity ratio and interest coverage ratio of Banco Products for the previous five financial years.
|Fiscal Year||Debt/Equity||Interest Coverage|
Future Plans Of Banco Products
So far we looked at the previous fiscals data for our fundamental analysis of Banco Products. In this section, we will try to get some sense of what lies ahead for the company and its investors.
- Banco has set up a wholly owned subsidiary Banco New Energy Cooling Systems Ltd. to develop specialised manufacturing cooling systems for EV machines.
- The company is actively working towards adding more products to its portfolio and building strategic supply relationships with various industrial MNCs.
- Along these lines, Banco invested Rs 125 crore and Rs 75 crore in FY23 and FY22 towards purchasing fixed assets.
We are almost at the end of our fundamental analysis of Banco Products. Let us take a quick look at the key metrics of the stock.
|CMP||₹515.25||Market Cap (Cr.)||₹3,651.74|
|EPS (TTM)||37.72||Stock P/E (TTM)||13.34|
|Promoter Holding||67.9%||Book Value||₹140|
|Debt to Equity||0.3||Price to Book Value||3.59|
|Net Profit Margin||10.1%||Operating Profit Margin||13.9%|
As we conclude our fundamental analysis of Banco Products, we can say that the recent volume growth and margin improvement aided the stock to post record profits. Going forward, the investors must closely track its quarterly sales growth and margins. Furthermore, as the industry is undergoing a shift towards the EV industry, Banco’s CAPEX plans must be closely monitored as well.
In your opinion, is the company at its peak performance or investors can anticipate higher sales and profits in the quarters to come? How about we continue this conversation in the comments below?
Written By Vikalp Mishra
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