PL Stock Report: Alicon Castalloy (ALIC IN) - Visit Update - Working on a multi-pronged strategy

Alicon Castalloy (ALIC IN) - Himanshu Singh - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: Not Rated | CMP: Rs855 | TP: NA

Visit Update - Working on a multi-pronged strategy

Quick Pointers:

• Reducing mix of 2W segment; Higher focus on 4Ws, EVs and exports.
• Strong order book of Rs.140bn to be executed over next 7 years.

We visited Alicon Castalloy’s (ALICON) plants in Chinchwad, Pune. The company highlighted clear strategy for reducing mix of highly competitive and lower margin 2W business by 1) increasing share of 4Ws, 2) increasing presence in EVs, 3) scaling up revenue from global markets, and 4) focusing on technology products and solutions. ALICON aims to ramp-up new business segments for strong revenue growth, while its existing business is expected to decline over the medium term. The company has received big orders from JLR for e-axle, cylinder heads from Toyota, PSA, Maruti Suzuki, Daimler, etc. which will increase 4Ws mix. Also, substantial jump in content per vehicle from ICE to EVs can provide much higher revenue potential. The company expects 2W volume to grow at low single digit, with higher growth in 2W EV and premium segment and thus is reducing focus on the segment.

We believe ramp-up of new businesses and change in mix will help expand revenue and margins for medium term. ALICON aims to reach revenue of Rs. 16bn in FY24 and Rs. 22bn in FY25 with EBITDA margin of 14% over next 3-4 years. A strong and expanding order book gives confidence in the company’s ability to achieve its targets of revenue and mix. The stock trades at 20.2x PE FY24 bloomberg consensus. Not Rated.

Focus on expanding high margin 4W segment: ALICON’s share in 4W business increased from 49% to 53% in FY23, while 2W share reduced from 41% to 38%. The company is more focused on 4W segment, as it is higher margin and less competitive. ALICON is shifting its value proposition from supplying partially finished cylinder heads to proving fully finished products. The company has secured contracts with two new major domestic customers for 4W cylinder heads. Additionally, they have developed a cylinder head for leading manufacturer of all-terrain vehicles, which will be supplied to the U.S. market. ALICON is actively collaborating with customers, including OEMs and Tier-1 suppliers, in product development and adjacent solutions. ALICON has seen structural change in behavior of OEMs who have started outsourcing critical ICE components to suppliers (eg. Toyota has for the first time in its history sourced cylinder heads from outside) and this presents big opportunity for suppliers like ALICON.

EVs present a substantial wallet share expansion opportunity: Weight of aluminum content will increase from 10kg in ICE PVs to 100kg in an EV for ALICON’s products, representing a substantial jump in addressable market. The company has extensive experience and a proven track record with 94 parts supplied to 17 customers in the EV domain and their European subsidiary, Illichmann, has been contributing in this space since 2017. ALICON has made significant investments in advanced technologies, particularly in thermal cooling solutions for the EV segment for motors and e-axles. ALICON is exploring friction stir welding, a highly recommended application in the area of EV for strong and high-quality joints. It has created a good reputation for motor housing products with dominant players in the PV EV market of India and is also witnessing growth in CV segment. ALICON secured its largest-ever multi-year order from a global customer for their e-mobility platform. Orders to customers like JLR for e-axel will start in FY25, with ramp-up in 2HFY25 which could provide boost to revenues.