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Buy Suprajit Engineering “Superior Connection”
Suprajit Engineering (Suprajit) promoted by Ajith Kumar Rai is the largest
automotive cable company in India with a capacity to manufacture 75mn units
of cables. Suprajit has a 45% market share and derives more than 75% of its
`2.5bn revenues from automotive OEMs of which 60% is from the three leading
two wheeler manufacturers in India.
Market leadership position, scalable business model and capacity expansion by
auto OEMs would in our view enable Suprajit to grow its net profits at a CAGR of
30% over the next 3 years on the back of an estimated 22% CAGR growth in
revenues during the same period.
We expect Suprajit to leverage benefits of scale in raw material sourcing across
its 10 facilities located in close proximity to its customers with no single customer
accounting for more than 20% of its revenues. We believe that Suprajit could get
a breakthrough with Maruti (not an existing customer) going forward which when
happens could propel volumes.
Suprajit is expanding capacities by 47% at its facilities to cater to the growing
needs of its customers and aims to grow its after market, export and non automotive
business (which together accounts for 25% of its revenues) as part of a conscious
strategy to de-risk its business model which is dependent on automotive OEMs.
Valuation
Suprajit with positive free cash generation trades at 5xFY’13E earnings and has a
superior ROCE of 38% and is the only small cap auto component company which
scored highly in our screener on companies with market capitalization above
`2bn based on parameters like sales growth, profit growth and valuation ratios for
the past 20 quarters. We rate Suprajit as a BUY and have assigned a multiple of
7.5x which is a 25% premium to its 3 year average trailing PE multiple of 6x, from
which we derive our price target of `31 (`1 F.V.), translating into an upside of 46%.
Risks and concerns
Higher than expected rise in input costs like steel and PVC components
Continued losses at Gills Cables UK may have a negative impact albeit low on
net profits
Sharp slowdown in auto industry is a risk which the company can mitigate only
partially through the non automotive business.
Investment Argument
Market leadership position and wide scale of operations is the USP
Suprajit is the market leader in control cables in India with a market share of 45% and
is globally positioned within the Top 5 rank. The company sells its products to most of
the domestic as well as global 2 wheeler and 4 wheeler companies. It is a single
source supplier to companies like TVS Motor and Volkswagen India. Suprajit has 10
manufacturing facilities (which produce cables and speedometers) operating at 80-
85% utilization, the latest one at Chakan has started full operations in CY 10. The
company has a capacity of 75mn cable units which will be expanded to 110mn units by
the end of FY 11. It also has a capacity of manufacturing 6 lakh speedometer units. By
virtue of having its facilities in the vicinity of all the major auto hubs in India, Suprajit we
believe has a clear logistic advantage.
Plant locations adjoining the major auto hubs in India to save
transportation costs
Suprajit has got 9 plants all over India. About 60% of Suprajit’s capacity is contributed
by Bomasandra unit 2 at Bangalore, Chakan and Manesar plants. The company has
prudently laid its plants in vicinity to the various plants of OEMs, so as to deliver timely
and earn goodwill from customers. Additionally it will enable Suprajit to save on
transportation cost and hold a competitive edge.
Capacity expansion plans to boost the topline
In order to cater to the rising demand from OEMs, Suprajit is expanding its cable
capacity by 47% from 75 mn at the end of FY 10 to 110 mn at the end of FY 11E. As the
company supplies cables to almost the entire auto industry, the growth in the company
can easily be traced with the growth of the industry. For this capacity expansion, Suprajit
has planned a capex of `250mn for FY 11E and a further capex of `100mn for FY 12E.
The FY11E capex includes the capex to be incurred at Tata Motors’ Nano plant at
Sanand. However, given the low demand for Nano, Suprajit plans to curtail its FY 11E
capex to `180-200 mn and may incur the rest in FY 12E if required. By virtue of this
expansion, we estimate cable volumes to grow at 25% yoy and overall consolidated
gross sales to grow at 33% yoy to `3,542 mn considering 8% growth in realization of
cables.
Growth in the Two wheeler industry to be the key growth driver
Suprajit derives ~ 77% of its revenues from OEMs out of which 60% is contributed by
the three two wheelers - Hero Honda, Bajaj Auto and TVS each contributing 20%. 4
wheelers contribute 30% and the rest is contributed by exports and other two wheelers.
This signifies Suprajit’s considerable dependence on the two wheeler industry. With
the split between Hero and Honda, competition in the two wheeler industry is expected
to intensify. Although this may hamper growth prospects of individual companies within
the sector, but for a supplier like Suprajit, this in fact entails more business as two
wheeler companies launch more and more products to ward competition.
Honda also being one of the clients of Suprajit, aggressive slurry of solo launches from
them will definitely lead to additional business for Suprajit. Suprajit is a single source
supplier for TVS, who is in the process of expanding capacities from 2.4mn to 2.8mn
which will only benefit Suprajit in the auto cable industry. Even companies like Hero
Honda and Bajaj Auto have given strong volume guidance for the full year (5.5mn and
4 mn respectively), which will also benefit Suprajit. The macro drivers for the two wheeler
industry like low penetration of two wheelers in India, strong rural demand, growing
youth population, improving income levels and slew of new product launches are
expected to remain intact in the medium to long term despite the short term worries
like rising inflation and interest rates.
Turnaround in Nano sales may add to volume expansion for Suprajit
Suprajit is planning to set up a Greenfield plant at Sanand, next to Tata Motors’ Nano
plant. However, currently the plans are on hold as Nano sales are dwindling. In
November, Nano sold just 500 units down from 9000 sold in July 2010. However, with
renewed marketing efforts, in December ~5800 units of the model were sold. Suprajit
will keep a close watch on the consistency of Nano sales in the coming months, based
on which it will decide whether they will be setting up a plant at Sanand or not by April
2011.If they do so, it will call for an additional volume of 10-15 mn per annum for a capex
of ~ `60mn. We have not factored in these volumes in our projections.Currently, Suprajits’
Wapi and Uttaranchal plants are catering to the Nano demand.
Fructification of deal discussion with Maruti Suzuki will be a boost for
Suprajit
Suprajit supplies cables to all the four wheelers except Maruti Suzuki. With Maruti Suzuki
expanding its capacity by ~5 lakh units in the next 1.5 years, it will require higher cable
volumes. For this purpose Maruti Suzuki is in advanced talks with Suprajit. Suprajit has a
plant location at Manesar, which is in vicinity of Maruti’s plant, thus saving transportation
cost for Suprajit and cutting any supply delay from Suprajit’s end. We believe that winning
Maruti Suzuki as a client would be a big boost for Suprajit.
Aftermarket, non-auto and export business is a new focus area for Suprajit
After market, exports and non-automotive businesses contributed 23% of total revenues
of Suprajit in FY 10. Among non-auto segment (5% of revenues) Whirlpool, LG, JCB are
some of the clients of Suprajit. It supplies non-auto cables mainly to washing machine
manufacturers and construction companies. The company has won a contract for John
Deere’s non auto business in India and expects the non-auto business to grow at a good
pace in the coming years. As far as the export market is concerned, Suprajit is getting
good export orders from various foreign auto and construction companies like Ferrari,
Volvo, Ford, Piaggio, Caterpillar, CLASS, Honda, New Holland Tractors etc. Management
has projected revenues of `400 mn for exports in FY 11E and expects it to grow by 25% in
FY 12E. Suprajit is also tapping the aftermarket demand aggressively. It has established
a marketing set up in South India for after market, because of which it expects aftermarket
business to double in FY 12 from the expected level of `250mn in FY 11E.
Haridwar plant to provide tax advantage
Suprajit also supplies products to Hero Honda from its Haridwar plant. Haridwar plant is
in the tax exempted zone and hence is getting tax holiday on its production. Currently the
company produces 7-8% from Haridwar, which is expected to move up to >10% in a
couple of years. This will save tax for the company which is expected to come down to
28% in FY 12E from the current rate of 30%.
EBITDA margins to sustain at 18% on muted growth in RM costs
Suprajit has guided for its EBITDA margins to be at 18% in FY 11E as it does not expect
raw material costs to increase significantly from present levels. In FY 12E, the company
anticipates expansion in margins as demand increases and the company gains operating
leverage from higher utilization rates (80% currently). Steel wires contributed 16% of total
RM costs in FY10. Management expects steel prices to move up by ~5% in FY 12E which
is lower compared to the hike witnessed this fiscal.
Robust Return Ratios and low leverage
Suprajit has high return ratios – 32.4% ROE and 38.6% ROCE and we believe the
company will be able to maintain this on the back of expected strong profitability arising
from growing volumes, growth in the auto industry and slower growth in raw material
costs.
Subsidiary performance to remain muted at the bottomline
Suprajit has two subsidiaries – Suprajit Automotive and Gills Cables UK (the marketing,
technological support and R&D set up for business in Europe). Suprajit Automotive is
a profitable cable business, as it reported profits of `20mn in FY10, while Gills Cable is
the acquired UK business which incurred loss of `13mn in FY 10. The losses can be
mainly attributed to higher employee costs in UK and lower scale of business. At the
top line, both the companies collectively had a turnover of `523mn which has fallen at
a pace of 11%, due to a 28% fall in the revenues of Gills Cable. The fall was due to lower
scale of operations and weaker European auto industry. Going forward, Suprajit expects
Gills Cable to break even in FY 11E and collectively report a top line growth of 25-35%
in FY 12E. Despite this at the bottom line it will contribute just 3-4% of the consolidated
net profits due to the size of the subsidiaries, higher employee costs in the UK and the
slow recovery in the European auto industry.
Company Background
Suprajit is a Bangalore based company manufacturing liner cables for automobile,
construction, and white goods industry and is currently India’s most preferred cable
manufacturer with 45% market share supplying to all the leading vehicle manufacturers.
The company has got 10 plant locations across India having a total capacity of 75mn
cable units and 6 lakh speedometers. Suprajit has two subsidiaries namely Suprajit
Automotive Ltd and Gills Cable UK which provides marketing, technology and R&D
support to the export business. Approximately 77% of Suprajit’s topline comes from
OEMs, out of which 60% is contributed by the three two wheeler companies – TVS,
Bajaj Auto and Hero Honda. The rest is contributed by 4 wheelers. Out of the remaining
23%, 10% is contributed by exports, while aftermarket and non-automotive business
contributes 8% and 5% respectively. Remsons Cables and Hylax Cables are the closest
competitors of Suprajit.
Financial performance
Revenues
Suprajit’s consolidated revenues have grown at a CAGR of 10% during FY 07 and FY
10, while it is expected to grow at a CAGR of 22% in FY 10-13E on account of capacity
expansion, strong auto demand, traction from non-auto business, aftermarket sales
and exports. In the first two quarters of the year, Suprajit has recorded sales of `1,505mn,
a growth of 53% yoy and in the full year, we are expecting a growth of 36% to `3,542 mn
in standalone sales and 33% to `3,293 in consolidated sales on higher base of FY 10.
EBITDA
Suprajit’s consolidated EBITDA has grown at a CAGR of 15% in the period between FY
07-10, which is expected to grow at a CAGR of 25% in the period between FY 10-13E as
improving utilization rates and product realization provides a healthy margin growth. FY
10 saw margins peaking at 18%, from a 13.7% margins in FY 08. In FY 11E, margins
are expected to remain flat and going forward we are expecting a 100 bps growth in
margin every year.
Net Profits
Suprajit’s net profits grew at a 11% CAGR during FY 07-10 and is estimated to grow at
a CAGR of 30% in FY10-13E. We expect 9-11% profit margins in FY11E-13E
Risks and concerns
Higher than expected rise in input costs such as steel and PVC components
Continued losses at Gills Cables UK may have some negative impact albeit low on net
profits
Sharp slowdown in auto industry is a risk which the company can mitigate only partially
through the non automotive business.
Outlook and Valuation
We expect Suprajit to report strong growth in coming years as it is expanding capacities
to cater to the robust demand from its customers and being a supplier to all leading
auto companies, will benefit from growth in the industry irrespective of the competition
within the sector. Furthermore, replacement, non-auto and export demand are also
expected to pick up as company is putting added efforts in these businesses. Margin
performance is expected to remain stable in FY 11E, and would improve in FY 12E and
FY 13E. With market leadership in cables, location advantage and a wide product
portfolio, we expect Suprajit to outperform its peers and improve its market share. At
CMP of `21, the stock trades at a P/E of 5x FY 13E EPS of `4.09. We have assigned a
multiple of 7.5x which is at a 25% premium to the 3 year average trailing P/E multiple of
6x, from which we derive a target price of `31, translating into an upside of 46%.
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