A breath of fresh air: why no fewer than twelve brokers see great value in the Tenneco Clean Air IPO

The Tenneco Clean Air India IPO has arrived with something the market has been asking for all year: reasonable pricing for a profitable, large-scale auto components business. The size of the offer is Rs 3,600 crore, entirely an offer for sale, in a price range of Rs 378-397 per share, with a proposed listing on BSE and NSE.Bookrunners include JM Financial, Citigroup, Axis Capital and HSBC, and the registrar is MUFG Intime. As many twelve broker notes say, the issue is reasonably priced relative to its peers and supported by improvement in profitability, cash flows and return ratios, supporting a ‘subscribe’ view for long-term investors. Some even advised investing for listing profits.

Wide width and depth

The appeal starts with breadth and depth. Tenneco Clean Air India manufactures clean air after-treatment systems, powertrain components and ride control products, supplying India’s top passenger and commercial vehicle OEMs and servicing the exports and aftermarket under global brands such as Champion and Monroe. “Growth will be led by increasing premiumization and stricter emission norms,” said Aditya Birla Capital Stocks and Securities. The company has 12 factories in seven states and a union territory and two Indian R&D centers that create platforms with OEMs. Installed capacity and usage are healthy for hot-end catalysts, cold-end exhausts and driving technologies, leaving room to grow without heavy upfront investments.

According to BP Wealth, Tenneco has long-term customer relationships averaging 19.2 years with its top 10 customers and has established deep technical integration with OEMs, reinforced by stringent qualification processes and homologation requirements that contribute to high customer retention.

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Strong market position

Market position is another pillar. Canara Bank Securities says the company has leadership in several sub-segments, including about 57% in clean air systems for commercial trucks, about 68% in off-road equipment and about 52% in shock absorbers and struts for passenger vehicles.

This positioning is in addition to the group-level IP – over 5,000 active patents and 7,500 trademarks – which can be tailored to Indian cost structures through local engineering and sourcing. Financial figures stable

On a financial level, the story was about operational leverage and margin recovery. While FY23-FY25 revenue was largely flat given the auto cycle, EBITDA margin grew from 11.8% to 16.7%, pushing PAT to Rs 552-553 crore in FY25 and improving return ratios. One comment signals an increase in return on equity to 42.7% and ROCE to 56.8% in FY25, reflecting a tighter cost base and mix benefits.

Above all, a reduced rating

At the top end of the price range, brokers estimate valuation at around 29x FY25 P/E and around 19x EV/EBITDA – described by some as reasonable and by many as a discount to peers given its asset base, localization and scale. Prices are well below listed auto parts competitors such as Bosch (57x), Uno Minda (64.9x) and Gabriel India (82.5x).

Add a touch of industrial tailwind

What could support profits from this is a combination of industry tailwinds. Analysts point to stricter emissions regimes (BS7, CAFE, TREM V, CEV-V) increasing clean air content per vehicle, premiumization increasing demand for advanced driving technologies, and the company’s ability to participate in hybrid/electric transitions via engine-independent suspension and select powertrains. The factories in India also act as a cost-competitive base for exports to group entities and global OEMs, adding a second growth engine outside the domestic cycle.

More than 80% domestic sourcing in FY25 and a manufacturing footprint close to OEM hubs, supported by lean programs and global operating systems that standardize quality and reduce defects. The two R&D centers collaborate early on in design and validation, integrating the company into customers’ product roadmaps.

The quality of the balance sheet is also discussed in the bull case. One report highlights a net debt-free profile, robust cash flow generation and a shift to premium products – all of which, combined with steady capital investments, support free cash flow and returns.

However, few risks remain.

Auto parts are cyclical and the concentration of revenues in PVs and CVs exposes the business to downcycles. The regulatory dependence goes both ways: stricter standards increase the value of the package, but policy delays or rapid adoption of electric cars could put pressure on parts of the clean air portfolio.

There is also a dependence on the global parent company for brand licensing, technology and know-how, which is integral to competitive advantage. Brokers call these factors to watch, even as the diversified portfolio and aftermarket/export mix provide some cushion.

(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of the Economic Times)