Subros – 2QFY2011 Result Update- Angel Broking

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Subros – 2QFY2011 Result Update

Angel Broking maintains a Buy on Subros with a Target Price of Rs57.

For 2QFY2011, Subros reported subdued performance on the bottom-line front,

despite healthy volume growth. Average net realisation registered a marginal

decline yoy. Net profit declined substantially due to contraction in operating

margin. However, owing to better growth visibility in the segment and reasonable

valuations, we maintain a Buy on the stock.

Overall performance below expectation: For 2QFY2011, Subros reported

higher-than-expected growth of 27.5% yoy in net sales to `278cr (`218cr).

Growth was primarily on the back of ~30% growth in volumes. The company,

however, registered a substantial 387bp yoy contraction in EBITDA margin on

account of a 435bp yoy rise in raw-material costs. Input costs increased due to

higher raw-material prices and adverse currency movement during the quarter

(Rupee v/s Yen). Thus, net profit declined by 27.1% yoy to `4.9cr (`6.7cr), despite

robust volume growth.

Outlook and valuation: We estimate the company’s volumes to post a CAGR of

~17% over the next two years, considering the increasing requirements of its

OEM customers such as Maruti and Tata Motors and potential new client wins

from the PV and CV segments. However, we expect realisations to be stable or

decline marginally due to the aggressive pricing adopted by OEMs. Thus, we

estimate Subros to post EPS of `4.2 for FY2011E and `5.7 for FY2012E. At the

CMP of `46, the stock is trading at 11.1x FY2011E and 8.1x FY2012E earnings.

We maintain Buy on the stock with a Target Price of `57.

Investment arguments

􀂄 Improved PV volumes to boost growth: We have estimated the PV segment to

post a healthy CAGR of ~14% over FY2010–12E. Given the company’s

dependence on the PV segment, we expect it to gain from India’s small car

growth story. The company’s volumes would also get a push due to the

continuous capacity ramp-up by new and existing players. Accordingly,

we expect Subros to register a volume CAGR of ~17% over FY2010–12E.

􀂄 Maintaining leadership position and expanding product base: A market leader

and largest player in the domestic car AC market, Subros enjoys more than

40% market share. The company has managed to garner high market share

on the back of its strong technological expertise backed by Denso and Suzuki.

Further, in view of growing PV volumes, the company has ramped up its

capacity to 1mn units per annum and proposes to expand capacity to 1.5mn

units per annum in the first phase and further to about 2mn units per annum

in the next two-three years. The capacity expansion will enable Subros to

assure volume to its OEM customers and to capture increased demand, as it is

already operating at ~93% of its enhanced capacity.

The company is planning to set up a new facility in Chennai to meet the

increasing OEM demand in the domestic market. As per management, the

new plant is being set up to cater to auto manufacturers in Chennai.

The company will also be investing about `100cr in the next two years to

expand the production capacities of its existing three facilities in Noida,

Manesar and Pune. Further, the company is looking at opening a plant in

Sanand to supply parts to Nano.

Management also proposes to foray into the CV segment, targeting leaders

such as Ashok Leyland and Eicher, to expand the company’s product base and

explore new avenues.

Outlook and valuation

We estimate Subros’ volumes to post a CAGR of ~17% over FY2010–12E,

considering the increasing requirements of its OEM customers such as Maruti and

Tata Motors and potential new client wins from the PV and CV segments. However,

we expect realisations to be stable or decline marginally due to the aggressive

pricing adopted by OEMs. Thus, we estimate Subros to post EPS of `4.2 for

FY2011E and `5.7 for FY2012E. At the CMP of `46, the stock is trading at 11.1x

FY2011E and 8.1x FY2012E earnings. We maintain Buy on the stock with a

Target Price of `57.