Equity Analysis /

Runner Automobiles Ltd: Balanced portfolio mix, headwinds ahead; Initiate with HOLD

  • Product diversification to add long-term value, super-growth expectation (c31% CAGR) from three-wheelers

  • Challenges ahead for two-wheelers & trucks. Overall topline & bottom-line growth expectation of 10% & 9% FY2021-25 CAGR.

  • Risks: prolonged economic impact of COVID-19 pandemic, demand change in two-wheelers, banking sector liquidity crisis.

IDLC Securities
12 April 2020
Published byIDLC Securities

Runner Automobiles Ltd. has diversified business lines of truck, two-wheelers, and three-wheelers. The company derives 45% (ownership adjusted) revenue from truck segment, 32% and 23% from two and three-wheelers respectively. RUNNERAU BD strives to establish as a strong ‘Bangladeshi’ brand mainly through penetrating the rural auto market. It sells two-wheelers with models ranging from 80cc to 200cc (80cc – 150cc for local sales, 150cc & 200cc for export sales). 70% of its bike revenue comes from below 125cc segments (80cc – 34%, 100cc – 20%, 110cc – 16%). It distributes Bajaj RE and Bajaj MAXIMA branded three-wheelers. The company owns 61.67% of Runner Motors Ltd. which distributes Volvo Eicher branded light & medium duty (LMD) and heavy-duty (HD) commercial vehicles (CV). 70% of its truck revenue comes from the medium-duty segment.

RUNNERAU BD has several industry experts as its local sponsor/directors holding 25% shares. Mr. Hafizur Rahman Khan holds the highest number of shares (9.5%) among them. He is also the founder of the company and one of the esteemed and experienced industrialists in the Bangladesh automobile sector. Brummer Frontier PE II, a private equity investment manager, holds another 25% shares as a foreign sponsor/director. It invested in RUNNERAU during 2013. Institutional (26%) and individual (24%) investors hold the rest shares.

Bangladesh's three-wheeler market witnessed an upsurge in 2018 (+136% YoY) & 2019 (+43% YoY) riding on old vehicle replacement sales. We expect demand to decline in 2020 (-27% YoY) due to the COVID-19 pandemic, super-growth (c31% CAGR) to resume afterward and continue till 2023 to reach c50,000 units and a volumetric drop thereafter to settle at c34,000 units. RUNNERAU’s three-wheeler outlook is expected to be in line with that of Bangladesh. The company has declared to set up a three-wheeler assembly plant by FY2021 which is expected to increase the three-wheeler GPM.

RUNNERAU’s yearly bike sales remained flat between 27,000-30,000 units although the country’s two-wheeler sales increased almost four folds in five years. We attribute this to the company’s dimmed presence in higher segment bikes. Ongoing price rift among players will be more severe as several players have started manufacturing upper segment bikes on the back of policy support. Moreover, bike demand will be battered especially in FY2020 due to the COVID-19 pandemic. Hence, we believe RUNNERAU’s three-wheeler optimism will be dwarfed by its depressed sales in the two-wheeler segment.

Bangladesh truck volume fell 34% YoY to 8,326 units in CY2019 as a consequence of the ongoing liquidity crisis in the banking sector and poor farmer economics in Q4CY19. Truck sellers are highly dependent on bank loans to import completely-built-unit (CBU) trucks and sell to the customers. On the backdrop of industry slowdown, RUNNERAU BD posted c9% growth in its truck business, maintaining c14% 5-year (2014-2019) CAGR. Also, 10% YoY growth in Q2FY2020 can be attributed to annual & sequential dip (-10bps YoY & -500bps QoQ) in EBIT margin due to commission-based push sales. We remain cautious about volumetric growth in the next 1-2 years on the impact of COVID-19 pandemic and rate cap imposition from April 2020. We expect the company’s truck sales to grow at a CAGR of c13% in 2022-2025 on the back of economic rebound from COVID-19, improvement of liquidity crisis & completion of ongoing infrastructural activities. The company has a plan to set up a truck manufacturing factory in the near future which will ease margin pressure a bit.

We initiate coverage on RUNNERAU BD with a HOLD recommendation with TP at BDT49 for December 2020, suggesting an ETR of 8.3%. This reflects the impact of top-line & bottom-line growth expectation of c10% & c9% FY2021-25 CAGR along with c18% and c30% decline in FY2020 respectively. Our TP implies 2021f P/E of 12.0x and EV/EBITDA & adjusted EV/EBITDA of 10.2x & 6.2x respectively. 

Risks to our recommendation include volumetric demand change in two-wheelers, policy changes especially for two-wheeler sellers, the prolonged economic impact of COVID-19 pandemic, deterioration of liquidity situation in the banking sector, and currency depreciation.