BUY. Suprajit Engineering (SEL) Automobiles

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1 Suprajit Engineering (SEL) Automobiles Strong performance. Suprajit Engineering reported a consolidated net profit of `210 mn in 3QFY16, which was 2% higher than our estimates. Phoenix Lamps was consolidated from 2QFY16 so yoy numbers are not comparable. The company grew revenues by 13% yoy in standalone operations and EBITDA by 21% yoy in 3QFY16, which is impressive led by strong growth in 4-wheeler and exports businesses. We maintain our BUY rating and revise our target price to 175 (from 165 earlier). BUY FEBRUARY 10, 2016 RESULT Coverage view: Attractive Price (`): 140 Target price (`): 175 BSE-30: 23,759 C ompany data and valuation summary Suprajit Engineering Stock data Forecasts/Valuations E 2018E 52-week range (Rs) (high,low) EPS (Rs) Market Cap. (Rs bn) 16.8 EPS growth (%) Shareholding pattern (%) P/E (X) Promoters 51.8 Sales (Rs bn) FIIs 4.6 Net profits (Rs bn) MFs 2.5 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute (1.2) ROE (%) Rel. to BSE Div. Yield (%) Strong performance in standalone operations led by gross margin improvement The company reported a growth of 13% yoy in standalone revenues driven by strong growth in 4-wheeler OEM and exports. The company is gaining market share in the 4-wheeler OEM segment and has 25% market share now. The company has also gained market share in the two-wheeler segment due to gain in market share with Honda Motorcycles. The company s revenue mix was two-wheelers (52%), four-wheelers (33%), aftermarket (10%) and non-auto (5%) in 3QFY16. Exports form 18% of consolidated revenues (excluding Phoenix Lamps) while domestic business forms 82% of revenues. The export business accounted for 14% of consolidated revenues in FY2014 and is growing at a fast clip. Gross margin improved 140 bps yoy largely driven by productivity improvements in their plants, which led to 120 bps yoy improvement in EBITDA margin. The company s market share in the replacement market is ~4-5%, which is likely to increase as it increases distribution presence in North, West and East India. The company is quite strong in South India in the replacement market. Exports and replacement markets are likely to be strong growth drivers for the company, which will help it grow higher than automotive production growth in India. Restructuring of Phoenix Lamps underway Phoenix Lamps reported 15% yoy decline in revenues and 31% yoy decline in EBITDA in 9MFY16. The company had taken steps to improve quality levels, accounting practices related to working capital and productivity levels, which have started to show results. EBITDA margin improved 330 bps on a qoq basis. Management expects further improvement in EBITDA margin as productivity levels are brought in line with Suprajit s standards. Maintain BUY rating on strong growth outlook We maintain our BUY rating on the stock with a revised target price of 175 (from 165 earlier). We have increased our earnings estimates by 5-6% over FY2017/18E driven by 4% increase in standalone revenue assumptions and bps increase in our EBITDA margin assumptions. We value the stock at 20X September 2017E EPS. We expect the company to deliver 30% earnings CAGR over FY E. Hitesh Goel hitesh.goel@kotak.com Mumbai: Nishit Jalan nishit.jalan@kotak.com Mumbai: Kotak Institutional Equities Research kotak.research@kotak.com Mumbai: For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

2 Automobiles Suprajit Engineering Exhibit 1: Suprajit s standalone 3QFY16 results were marginally above our estimates Suprajit Engineering standalone results, March fiscal year-end, 3QFY16 ( mn) (% chg.) 3QFY16 3QFY16E 3QFY15 2QFY16 3QFY16E 3QFY15 2QFY16 9MFY16 9MFY15 Yoy chg. (%) 2016E Net sales 1,591 1,551 1,411 1, ,307 3, ,861 Raw materials (981) (974) (890) (931) (2,680) (2,465) (3,634) Staff costs (192) (185) (179) (180) (541) (502) (738) Other expenses (133) (115) (107) (108) (337) (307) (471) Total expenses (1,307) (1,274) (1,177) (1,218) (3,558) (3,273) (4,843) EBITDA ,018 Depreciation (21) (20) (20) (20) (62) (60) (86) EBIT Other income Interest expense (47) (43) (36) (45) (130) (103) (167) Profit before tax Exceptional income/(expense) (10) (17) (46) Tax expense (83) (70) (69) (65) (203) (159) (277) Profit after tax EPS (Rs) As % of net revenues Raw material cost as % of net sales Staff cost as % of net sales Other expenses as % of net sales No. of shares Tax rate (%) EBITDA margin (%) EBIT margin (%) Exhibit 2: Suprajit s consolidated 3QFY16 EBITDA was 12% above our estimates Suprajit Engineering consolidated results, March fiscal year-end, 3QFY16 ( mn) (% chg.) 3QFY16 3QFY16E 3QFY15 2QFY16 3QFY16E 3QFY15 2QFY16 9MFY16 9MFY15 Yoy chg. (%) 2016E Net sales 2,605 2,391 1,628 2, (0.7) 6,782 4, ,273 Raw materials (1,468) (1,016) (1,598) 44.5 (8.1) (3,991) (2,817) (5,504) Staff costs (360) (224) (337) (922) (645) (1,296) Other expenses (348) (136) (281) (799) (404) (1,011) Total expenses (2,176) (1,376) (2,217) 58.1 (1.8) (5,712) (3,866) (7,811) EBITDA , ,462 Depreciation (41) (38) (25) (48) (13.2) (118) (73) (175) EBIT ,287 Other income Interest expense (61) (60) (44) (63) (170) (125) (246) Profit before tax ,232 Exceptional income/(expense) (10) (17) (46) Tax expense (142) (96) (76) (101) (307) (182) (393) Minority interest (44) (44) (84) Profit after tax EPS (Rs) As % of net revenues Raw material cost as % of net sales Staff cost as % of net sales Other expenses as % of net sales No. of shares Tax rate (%) EBITDA margin (%) EBIT margin (%) KOTAK INSTITUTIONAL EQUITIES RESEARCH

3 Suprajit Engineering Automobiles Exhibit 3: Phoenix s consolidated EBITDA declined by 23% yoy in 3QFY16 partly due to EUR depreciation Phoenix Lamps consolidated results, March fiscal year-end, 3QFY16 ( mn) (% chg.) 3QFY16 3QFY15 2QFY16 3QFY15 2QFY16 9MFY16 9MFY15 Yoy chg (%) 2016E Gross sales ,496 2,879 Excise duty (54) (42) (48) (144) (127) Net sales (16) (12) 2,352 2,751 (14.5) 3,150 Raw materials (415) (527) (556) (21) (25) (1,357) (1,568) (1,780) Staff costs (124) (131) (120) (5) 3 (361) (384) (504) Other expenses (129) (122) (109) 6 18 (359) (399) (454) Total expenses (669) (780) (786) (14) (15) (2,076) (2,351) (2,738) EBITDA (23) (31.1) 412 Depreciation (16) (26) (25) (38) (34) (78) (90) (90) EBIT (20) (36.3) 322 Other income Interest expense (10) (17) (13) (41) (43) (61) Profit before tax (7) Exceptional income/(expense) 18 (2) 1 40 (14) - Tax expense (43) (38) (25) (87) (85) (90) Profit after tax (28.9) 211 EPS (Rs) (28.9) 1.8 As % of net revenues Raw material cost as % of net sales Staff cost as % of net sales Other expenses as % of net sales No. of shares Tax rate (%) EBITDA margin (%) EBIT margin (%) Exhibit 4: We have increased our FY E consolidated EPS estimates by 5-6% Earnings revision table, March fiscal year-ends, E ( mn) Standalone New estimates Old estimates % change 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E Net sales 5,861 7,026 8,123 5,629 6,737 7, EBITDA 1,018 1,275 1, ,163 1, Margin (%) Net Profit EPS (Rs/share) Consolidated Net sales 9,273 11,667 13,252 9,283 11,821 13,400 (0.1) (1.3) (1.1) EBITDA 1,462 1,959 2,232 1,419 1,893 2, Margin (%) Net Profit , , EPS (Rs/share) KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

4 Automobiles Suprajit Engineering Exhibit 5: Two-wheeler accounts for almost of 55% of Suprajit s revenues Consolidated revenue breakdown of Suprajit (ex-phoenix Lamps), March fiscal year-ends, E ( mn) E 2017E 2018E Revenues (mn) Two-wheeler 2,789 3,037 3,275 3,765 3,892 4,451 4,914 Automotive 1,143 1,366 1,727 1,555 1,716 2,190 2,591 Non auto ,260 1,596 Replacement Total revenues 4,572 5,061 5,955 6,651 7,081 8,516 9,893 Domestic 4,115 4,504 5,122 5,540 5,913 7,008 7,984 Exports ,111 1,168 1,508 1,909 Contribution to sales (%) Two-wheeler Automotive Non auto Replacement Total Domestic Exports Volumes (mn units) Two-wheeler Automotive Non auto Replacement Total Domestic Exports Realizations (Rs/unit) Two-wheeler Automotive Non auto Replacement Total Domestic Exports KOTAK INSTITUTIONAL EQUITIES RESEARCH

5 Suprajit Engineering Automobiles Exhibit 6: We expect standalone net profit to grow at 25% CAGR over FY E Standalone profit model, balance sheet and cash flow statement, March fiscal year-ends, E ( mn) E 2017E 2018E Profit model (Rs mn) Net sales 3,005 3,787 4,210 4,823 5,222 5,861 7,026 8,123 EBITDA ,018 1,275 1,491 Other income Interest and finance charges (61) (86) (96) (118) (135) (167) (175) (169) Depreciation (49) (51) (57) (69) (75) (86) (97) (111) Pre-tax profits ,044 1,261 Extraordinary items 50 Income tax (122) (157) (183) (216) (219) (277) (313) (378) Net profits Earnings per share (Rs) Balance sheet (Rs mn) Total equity 978 1,280 1,649 1,993 2,301 2,731 3,242 3,861 Deferred tax liability Total borrowings ,158 1,418 1,618 1,718 1,668 Other liabilities ,131 1,253 1,367 Total liabilities and equity 2,035 2,645 3,288 4,099 4,765 5,560 6,293 6,975 Cash Current assets 992 1,349 1,739 2,455 2,809 3,049 3,419 3,766 Total fixed assets 788 1,021 1,205 1,340 1,641 1,855 2,059 2,348 Other long term assets Total assets 2,035 2,645 3,288 4,099 4,765 5,560 6,293 6,975 Free cash flow (Rs mn) Operating cash flow, excl. working capital ,113 Working capital 18 (282) (107) (245) (38) (75) (248) (233) Capital expenditure (256) (285) (194) (205) (380) (300) (300) (400) Investments 4 (92) (252) (280) (349) Free cash flow 166 (49) Ratios (%) EBITDA margin (%) Gross margin (%) Debt/equity (X) Net debt/equity (X) RoAE (%) RoACE (%) KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

6 Automobiles Suprajit Engineering Exhibit 7: We expect consolidated net profit to grow at 30% CAGR over FY E Consolidated profit model, balance sheet and cash flow statement, March fiscal year-ends, E ( mn) E 2017E 2018E Profit model (Rs mn) Net sales 3,467 4,238 4,625 5,452 6,118 9,273 11,667 13,252 EBITDA ,462 1,959 2,232 Other income Interest and finance charges (74) (93) (102) (134) (164) (246) (275) (269) Depreciation (72) (75) (81) (84) (90) (175) (219) (234) Pre-tax profits ,232 1,575 1,851 Extraordinary items 50 Income tax (135) (150) (197) (236) (245) (393) (478) (562) Minority interest (84) (154) (173) Net profits ,116 Earnings per share (Rs) Balance sheet (Rs mn) Total equity 969 1,292 1,667 2,047 2,408 3,003 3,727 4,578 Deferred tax liability Total borrowings ,029 1,421 1,660 3,455 2,855 2,855 Other liabilities ,018 1,128 2,339 2,165 2,266 Total liabilities and equity 2,203 2,818 3,519 4,561 5,286 8,888 8,838 9,789 Cash Current assets 1,233 1,578 1,968 2,885 3,312 5,224 5,673 6,326 Total fixed assets 910 1,134 1,365 1,531 1,850 2,317 2,619 2,906 Other long term assets Total assets 2,203 2,818 3,519 4,561 5,286 8,888 8,838 9,789 Free cash flow (Rs mn) Operating cash flow, excl. working capital ,634 1,497 Working capital (114) (299) (139) (344) (81) (1,307) (17) (553) Capital expenditure (263) (300) (331) (253) (412) (642) (521) (521) Free cash flow 103 (37) (1,272) 1, Ratios (%) EBITDA margin Gross margin Debt/equity (X) Net debt/equity (X) RoAE RoACE KOTAK INSTITUTIONAL EQUITIES RESEARCH

7 Disclosures "I, Hitesh Goel, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report." Kotak Institutional Equities Research coverage universe Distribution of ratings/investment banking relationships 70% 60% 50% Percentage of companies covered by Kotak Institutional Equities, within the specified category. Percentage of companies within each category for which Kotak Institutional Equities and or its affiliates has provided investment banking services within the previous 12 months. 40% 30% 20% 10% 0% 32.9% 34.1% 17.9% 15.0% 6.4% 2.3% 1.7% 0.0% BUY ADD REDUCE SELL * The above categories are defined as follows: Buy = We expect this stock to deliver more than 15% returns over the next 12 months; Add = We expect this stock to deliver 5-15% returns over the next 12 months; Reduce = We expect this stock to deliver -5-+5% returns over the next 12 months; Sell = We expect this stock to deliver less than -5% returns over the next 12 months. Our target prices are also on a 12-month horizon basis. These ratings are used illustratively to comply with applicable regulations. As of 31/12/2015 Kotak Institutional Equities Investment Research had investment ratings on 173 equity securities. Source: Kotak Institutional Equities As of December 31, 2015 Ratings and other definitions/identifiers Definitions of rating BUY. We expect this stock to deliver more than 15% returns over the next 12 months. ADD. We expect this stock to deliver 5-15% returns over the next 12 months. REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months. SELL. We expect this stock to deliver <-5% returns over the next 12 months. Our target prices are also on a 12-month horizon basis. Other definitions Coverage view. The coverage view represents each analyst s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious. Other ratings/identifiers NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. CS = Coverage Suspended. Kotak Securities has suspended coverage of this company. NC = Not Covered. Kotak Securities does not cover this company. RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA = Not Available or Not Applicable. The information is not available for display or is not applicable. NM = Not Meaningful. The information is not meaningful and is therefore excluded. KOTAK INSTITUTIONAL EQUITIES RESEARCH 7

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