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Rides the demand wave…
Subros reported a mixed set of Q2FY11 numbers as it beat our topline
estimates at Rs 278.2 crore (I-direct estimate: Rs 250.7 crore) seeing
volume driven growth of 19.3% QoQ and 30% YoY to 2.3 lakh units. In
contrast, blended realisations remained flat in H1FY11 due to
unfavourable currency movements. On the costs front, higher content of
imported components have led to input costs rising 370 bps as the yen
has appreciated ~14% in H1FY11, thereby, also leading to a sequential
decline of 230 bps. Reported PAT was at Rs 4.9 crore on the back of
lower tax accounting due to tax exemptions received for research and
development (R&D) activities and other deferred tax benefits.
Marquee client relationship stems growth
Strong demand from its major clients like Maruti Suzuki, Tata Motors and
M&M has led to robust volume growth of 30% YoY and 19.3% QoQ with
Maruti Suzuki’s share increasing to ~80% with strong volume growth in
OEMs sales. The company is also significantly improving volumes to
newer entrants like GM, Ford etc and still remains one of the preferred
choices with a market share of ~40%.
Unfavourable forex movement erodes margin
Subros has ~60% component requirements sourced from Japan (yen
denominated), which has seen a steep appreciation (~14%) in the first
half of this fiscal. However, in H2FY11 the management has undertaken
hedges and also would be receiving benefits from exposure cover from
clients like Maruti Suzuki, thereby providing added cushion to margins.
Valuation
Burgeoning domestic demand fuelled by new model launches of OEMs
and a strong market share for Subros would continue to drive volumes.
At the CMP of Rs 46, the stock is trading at 13.2x FY11E EPS of Rs 3.5 and
5.9x FY12E EPS of Rs 7.8. We have valued the stock at 6.5x FY12 EPS of
Rs 7.8 to arrive at a target price of Rs 51. Our target price implies an
upside potential of 12%. Our rating on the stock is unchanged at BUY.
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