Suprajit Engineering Ltd - Long Term Story Intact; Result Update Q3FY15 ::Edelweiss, report

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Suprajit Engineering Ltd (SEL) results were below expectation. The EBITDA margins for Q3FY15 stood at 15.5% Vs expectation of 17.5% led by appreciating Euro (~20%). Subsidiary EBITDA margins have always remained volatile in past, as SEL does not have currency pass-on clause and due to receivables revaluation.  Suprajit has passed enabling resolution in compliance with new companies act and does not intend to do QIP in near future. We expect sales run rate to improve from Q1FY16 onwards as Pathredi plant comes on-stream by March-15 as we believe this will co-inside with revival in domestic demand and inventory rationalization in export market. Baring short term hiccups we believe long term story for Suprajit remains intact (exports growth, new order wins).

Sales for quarter muted; Maintains 5%-10% above industry growth

SEL net sales for Q3FY15 reported a muted growth of 2% YoY led by flattish growth in standalone business. Standalone sales was flattish (-1% YoY) due to de-growth in OEM aftermarket segment. 4 wheeler industry sales ex Maruti were up by 2% YoY while 2 wheeler industry growth stood at 4% YoY for the quarter. Company has maintained to grow at 5%-10% above domestic industry growth. SEL has higher share of the incremental PV business, implying market share gains going forward. SEL has  also secured orders from Honda and with Sanand plant commissioning by March-16, company share of business to Honda will increase from 30% to 50%. Subsidiary sales representing exports were up by 25% YoY despite Euro appreciation (40% of exports) by 20%, US tractor sales remained sluggish due to fall in grain prices (reduced farmer profitability) and OEM inventory rationalization in Europe car market. Subsidiary sales runrate has remained flat QoQ despite short term negatives, reinforces our confidence that exports will bounce back sharply.

EBITDA margins for quarter at 15.5%; Subsidiary margins are historically volatile

EBITDA margins for Q3FY15 stood at 15.5% down by 80 bps QoQ led by 130 bps fall in gross margins. However standalone margins improved by 120 bps QoQ led by better gross margins. Subsidiary margins have been volatile in past quarter ranging from 0.2% to 21.7%, hence Q3FY15 margins at 7.8% down from 21% Q2FY15, is not a surprise. This could be possibly due to SEL not having forex pass-on clause with OEMs. Also Euro appreciation also leads to revaluation of receivables which impacts profitability and leads to volatile. Company is planning to re negotiate prices with some export customers. We believe company will be able to maintain ~17% EBITDA margins over next 2-3 years.

Capacity to increase by 50%; Incremental ROCE to remain at 35% plus

SEL has planned INR 80 cr capex over the next two years for its three plants. SEL will spend INR 35 cr in FY16E. Post capex capacity is expected to be about 200-225 million cables an increase of 50% from existing capacity. Pathredi plant is expected to be largest plant for SEL over 3 years which adequate infrastructure to support expansion. In the past, the company has generated sufficient cash flows to be able to cover its capex plans, leading to a healthy balance sheet.

LINK
https://www.edelweiss.in/research/Suprajit-Engineering-Ltd--Long-Term-Story-Intact;-Result-Update-Q3FY15/10005545.html