Sterling Tools Ltd. (NSE:STERTOOLS) poised for growth with strategic investments in EV and collaborations with global players

“We are closing that business at about INR 120 crores for about nine months this year. And the most important fact would be that in the first full year of operations, we already have a positive bottom line. The business is already generating cash in the portfolio of the business. ” – MR. ATUL AGGARWAL – WHOLE TIME DIRECTOR

Stock Data
Ticker	NSE: STERTOOLS & BSE: 530759
Exchange	NSE & BSE
Industry	Auto Ancillary

Price Performance
Last 5 Days	-1.45%
YTD	+43.58%
Last 12 Months	+154.24%

Company Description:

Sterling Tools Ltd. (STL) is a fastener manufacturer founded in 1979, with its headquarters in India. The company offers a wide range of fasteners, including Standard, Chassis, Special, and Engine Fasteners, primarily serving the automobile industry. It is the second-largest fastener manufacturer in India, after Sundaram Fasteners, and caters to leading automotive companies in India and tier-I auto component manufacturers in the USA, Europe, South America, and the Middle East. STL has three manufacturing plants in Haryana, with a fourth manufacturing plant in Karnataka. The company’s current manufacturing capacity is around 38,000 MT per annum, with an additional ~10,000 MTPA capacity at its new facility in Karnataka. The product portfolio of STL includes fasteners that find application in both automotive and non-automotive segments.

Critical Success Factors:

• According to Crisil Research, the automobile sector in India is expected to see a growth in sales across all segments, with commercial vehicle sales, passenger vehicles, and tractors driving past pre-pandemic levels next fiscal. Commercial vehicle sales are expected to grow due to improving fleet utilization, higher replacement demand, and the scrappage policy. Two-wheeler sales are expected to be driven by reopening of educational institutions and offices, positive rural sentiments, and increased demand for electric vehicles. The growing demand and resultant rise in operating leverage is expected to boost profitability for auto ancillary companies like Sterling Tools Ltd.
• Sterling Tools Ltd. (STL) has a diversified revenue profile, catering to all major automotive segments, as well as some non-automotive segments. Its dependence on each segment is limited, with commercial vehicles accounting for only 28% of its OEM revenues in FY2022, followed by passenger vehicles, two-wheelers, and tractors. The company’s diversified presence helps to protect its revenues and earnings from demand downturns that impact specific automotive segments. It serves multiple OEMs across the automotive spectrum, with a healthy share of business with most leading OEMs and limited dependence on a single customer.
• Two-wheelers and three-wheelers account for over 80% of vehicle sales in India, and increasing e-2W penetration is expected in the Indian market due to favorable total cost of ownership, vehicle uptake from the delivery segment, and continued national and state-level subsidies. Sterling Tools Ltd. (STL) entered the electric vehicle segment in January 2020 through its partnership with Jiangsu Gtake of Shenzhen, called Sterling Gtake E-mobility Ltd (SGEM), where it is manufacturing motor control units (MCUs) in India. SGEM has become one of the largest e-2W MCU suppliers in India with a market share of 50% in the high-speed scooter segment and about 33% in the overall 2W segment. SGEM received its first order worth Rs 60 crore in July 2021 from an e-2W OEM, which was followed up by an additional order of Rs 100 crore from the same OEM.
• Sterling Tools Limited (STL) entered into a technical collaboration with Meidoh Co. Ltd. in 2017, a leading player in high tension fasteners and one of the largest suppliers to Toyota. The collaboration has improved STL’s product development capabilities for specialized fasteners and increased orders from Japanese manufacturers such as Toyota and Maruti Suzuki. Meidoh also invested Rs 44cr for a 5% stake in STL in 2018.
• In FY19, STL invested Rs 4cr in Altigreen, a 3W EV cargo manufacturer in India. Altigreen is focused on making vehicles that are suitable for Indian roads and weather conditions to provide the best possible experience to riders. In Feb’22, Altigreen raised Rs 300 crore (USD 40 million) in a funding round aimed at expanding its production capacity, launching new products, and developing a pan-India network. The freshly raised capital will be used to accelerate R&D, increase production capabilities, and develop a robust pan-India network to offer clean and efficient last-mile transportation solutions. Following this fundraising round, STL’s investment in Altigreen is expected to have significant upside potential.

Key Challenges:

• As a supplier to the automobile industry, STL’s revenue and growth prospects are closely tied to the performance of the industry. Any slowdown in the automobile industry could impact the demand for STL’s products and services, leading to lower revenue and growth prospects. This could be caused by a variety of factors, such as economic slowdown, changes in government regulations, and increased competition in the market.
• STL uses various raw materials like copper, aluminum, and steel for manufacturing its products. Fluctuations in the prices of these raw materials can impact the company’s profitability. Additionally, the company may not be able to pass on the increased costs to its clients immediately, resulting in a lag effect that could impact its financial performance in the short term. Therefore, raw material price volatility is a significant risk for STL.
• STL is susceptible to pricing pressure from OEMs (original equipment manufacturers) and peers in the auto component industry. As the industry becomes increasingly competitive, there is a risk that STL may not be able to pass on the increase in costs easily to its clients. This could result in a decline in its profit margins and affect its overall financial performance. OEMs are known to negotiate hard with their suppliers to get the best possible prices, and this puts pressure on suppliers to maintain their margins while also keeping their clients satisfied. In addition, with the increase in competition in the auto component industry, there is a risk that STL may have to compete on price to win contracts, which could put further pressure on its margins.
• STL has been primarily operating in the fasteners product category, which limits its product diversification and offerings. While the company has expanded into the MCU (motor control unit) segment, fasteners continue to account for more than 80% of its revenues. This indicates that the company is heavily reliant on its fasteners business and any slowdown or disruptions in this segment could have a significant impact on its financial performance. The lack of diversification in its product portfolio could also make the company vulnerable to market competition and changing consumer preferences. Therefore, the company may need to explore opportunities to expand its offerings and product portfolio to reduce its dependence on fasteners and mitigate potential risks.

Q3FY23 Result:

Sterling Tools Ltd. (STL) reported strong Q3FY23 results, with the highest ever quarterly consolidated revenue of Rs 208 crore, a YoY increase of 70%. The increased revenue was driven by the increased offtake of Motor Control Units (MCUs) in the EV business, which reported a turnover of Rs 119 crore in 9MFY23 compared to Rs 7 crore in the corresponding period in the previous year. The EBITDA increased by 76% YoY to Rs 28 crore, with an EBITDA margin expansion of 40 basis points to 13.5%, due to higher capacity utilization. However, the EBITDA margin declined 13.5% sequentially. The PAT for the quarter stood at Rs 14 crore, up 155% YoY, with a PAT margin expansion of 220 basis points to 6.7%. The new capacity utilization was around 70%. Ola is the major customer for MCU, with monthly wholesale sales of 20,000+ units in October-December period.