30Nov17 Company Data CMP 263 Target Price 297 Previous Target Price NA Upside 1 52wk Range H/L 291/147 Mkt Capital (Rs Cr) 1,578 Av. Volume (,000) 19 RoE to improve sharply in FY19 RoE 25% 2 2 1 Key Highlights of the Report: The company reported healthy revenue growth of YoY in 2QFY18, primarily driven by strong passenger vehicle sales during the quarter. INDUSTRY BLOOMBERG AUTO ANCILLARY SUBR IN BSE Code 517168 NSE Code NIFTY SUBROS 10361 EBITDA Margin improved by 48bps YoY and 30bps QoQ to 11.9% mainly on account of increasing localization and benefit of operating leverage. SUBROS is the market leader in the Indian passenger vehicle AC with a market share of approx 4. Maruti Suzuki is the biggest client for the company which contributes 7 of the SUBROS topline. We expect RoE of and 2 in FY18 and FY19 respectively. Based on the strong demand outlook of passenger vehicle industry and new launches by OEMs, we expect Revenue and PAT to grow at CAGR of 17% and 54% respectively, in FY1719E. Hence we value SUBROS at Rs.297 (17.2x FY19E EPS) and recommend ACCUMULATE rating on the stock. 5% 6% 7% Shareholding patterns % Financials/Val. FY15 FY16 FY17 FY18E FY19E Net Sales 1,202 1,311 1,554 1,858 2,138 EBITDA 137 152 167 195 254 EBIT 58 66 79 111 171 PAT 20 24 45 59 104 2QFY18 1QFY18 4QFY17 EPS (Rs) 3 4 7 10 17 Promoters 40.0 40.0 40.0 EPS growth (%) 4% 2 88% 31% 76% Public 60.0 60.0 60.0 ROE (%) 6% 7% 1 2 Total 100.0 100.0 100.0 ROCE (%) 1 16% 21% 31% BV 53 56 58 66 79 Stock Performance % P/B (X) 1.1 1.6 3.6 4.0 3.3 1Mn 3Mn 1Yr P/E (x) 17 22 28 27 15 Absolute (3.4) 19.5 61.7 Rel.to Nifty (3.4) 13.7 34.5 ABOUT THE COMPANY Subros Ltd (SUBROS) was established in 1985 as a JV between Suri 170 SUBROS NIFTY Group (4 stake), Denso Corporation (technology partner; 1 stake), 160 and Suzuki Motor Corporation (1 stake). The company is India s leading 150 manufacturer of automotive AC systems, with a market share of 4. 140 130 120 110 100 90 80 It has four manufacturing facilities in India (Noida, Manesar, Pune, Chennai and Sanand) and has an annual capacity of mn AC kits. The company has the capability to manufacture compressors, condensers, heat exchangers, and all the connecting elements that are required to complete the AC loop. The main clientele include: Maruti Suzuki, Tata Motors, Mahindra & Mahindra, Force motors, Ashok Leyland, Nissan, Indian railways etc. NAVEEN KUMAR DUBEY Naveen.dubey@narnolia.com
323 329 360 322 433 373 415 415 497 218 221 244 221 308 254 284 288 355 Quarterly Performance Financials 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 YoY % QoQ% FY16 FY17 YoY % Net Sales 433 373 415 415 497 2 1,311 1,554 19% Other Income 2 (0) 0 1 3 35% 421% 3 3 3 COGS 308 254 284 288 355 2 883 1,067 21% Employee Cost 39 39 40 41 45 14% 9% 134 157 17% Other Expenses 40 38 46 41 43 7% 142 163 EBITDA 45 42 46 44 54 2 2 152 167 Depreciation 22 21 22 21 23 6% 8% 87 88 EBIT 24 21 24 23 32 3 36% 66 79 2 Interest 10 10 11 9 10 6% 9% 42 42 1% PBT 16 10 13 14 24 5 69% 26 40 5 Exceptional Item 13 8 7 1 1 31 Tax (1) (1) (1) 3 8 77 179% 2 (5) 299% PAT 5 3 7 11 15 2 4 24 14 4 Healthy revenue growth of YoY driven by strong PV sales The company reported healthy revenue growth of YoY in 2QFY18, which was primarily driven by strong passenger vehicle sales during the quarter. Subros contributes around 7 of Maruti's sales volume and Maruti grew handsomely by 19%YoY during 2QF18. Strong demand for premium segment cars coupled with festive season led to this growth. New launches from other OEMs (Tiago and Kwid) have also fared well for the company. EBITDA grew by 2YoY to Rs.54 crores in 2QFY18. Increasing localisation and benefit of operating leverage during the quarter were the main reasons for growth in EBITDA. There was an exceptional item of Rs.92 lakhs which was related to the fire incident happened in Manesar plant in previous year. Tax rate for the quarter stood at Rs.8.28 crore, which was higher due to first time implication of Ind AS and reduction in R&D benefit. PAT grew by 2 YoY to Rs.15 crores in 2QFY18. Net sales trend COGS and Gross Margin trend Net sales Growth YoY COGS Gross Margin 600 500 400 300 200 100 17% 17% 9% 34% 1 29% 4 35% 3 25% 2 5% 400 350 300 250 200 150 100 50 3 3 3 31% 29% 3 3 31% 29% 34% 3 3 31% 3 29% 28% 27% 26%
39 39 40 33 45 42 46 44 54 6 6 8 (1) 5 3 7 11 15 Operating leverage benefit drives margin in 2QFY18 Margin % 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 YoY(+/) QoQ(+/) FY16 FY17 YoY(+/) Gross Margin 29% 3 3 31% 29% 0.18% 2.1% 3 31% 1. EBITDA Margin 0.48% 0. 1 0.9% PAT Margin 1% 1% 1.91% 0.5% 1% 0.9% Gross Margin contracted by 20bps YoY and 210bps QoQ due to higher commodity prices in 1QFY18. The major raw material for the company are Aluminium and Poly propelene. EBITDA Margin improved by 48bps YoY and 30bps QoQ mainly on account of benefit arises from operating leverage. PAT margin expanded by 191bps YoY and 50bps QoQ to 3.0. EBITDA and EBITDA Margin trend PAT and PAT Margin trend 60 50 40 30 20 10 EBITDA(Rs. Crore) 1 1 EBITDA Margin 1 1 1 9% 16 14 12 10 8 6 4 2 (2) (4) PAT(Rs. Crore) PAT Margin 1% 1% 4% 1% 1% 1% 1% Concall Highlights: Market share 39% in passenger vehicle AC segment. Currently Cars and Non cars mix is 90:10 and the management expects mix to reach 80:20 in next 2 years. Radiator business revenue target for 2HFY18 would be Rs.110 crores and for FY19 Rs.290300 crores. Railways Business Revenue: Rs.2025 crores per annum going forward. EBITDA margin can move towards 13.514% range in next 2 years. The major drivers would be increase in the mix of new business and localisation. Debt reduction Rs.2025 crores in FY18 and Rs.5060 crores in FY19. Cost of borrowings 8.25%p.a. on new debt and it will further reduce in FY19 after the rating improvement. The government has made installation of AC or blowers in the truck cabins mandatory from 1st January 2018. Subros has already tied up with major OEMs (Ashok Leyland, Tata Motors, M&M, SML ISUZU) and as stated by the management Subros has market share of around 7 with these customers. Truck AC market: 300000 and Bus AC market: 40000 units (4 market share). Tax rate 3 for FY18. Capex guidance of Rs.74 crore for FY18. Large chunk of this capex will be spent on new product development and rest will be towards capacity bottlenecks. Current capacity utilization is around 9.
1,171 1,155 1,292 1,429 1,569 1,744 1,909 1.75 Investment Arguments: Single largest supplier to Maruti Suzuki: SUBROS is the largest supplier of Passenger vehicle air conditioners systems to Maruti and caters almost 7 of Maruti's volume. In the recent past the company remained the biggest beneficiary of successful model launches from Maruti and currently it caters all the well liked models; Alto, Baleno, Brezza, Dzire and Swift. Going forward we expect Maruti's volumes to grow at CAGR for next two years based on the strong demand outlook. Mandatory AC or Blower units for Truck cabins: Government has mandated Air conditioner or blower facility in M&HCVs from 1st Jan 2018. The company has already tied up with major OEMs like; Ashok Leyland, Tata Motors, SML Isuzu and M&M. As per management the incremental market for Truck AC is around 250300K trucks per year. Localisation to play vital role in Gross Margin improvement: Subros has focused approach to increase localisation in order to reduce material cost and this exercise can shoot up the gross margin by 350400 bps in next 23 years. Currently the raw material import is about 4245% of total RM cost but the management has clear strategy to bring it down to 3 in next two year time by increasing in house manufacturing of critical components like evaporators and heat exchangers. Capacity expansion drive inline with Maruti Suzuki: The capacity expansion plan is also on cards inline with Maruti Suzuki which will complete by FY19. Currently, the company has mn units per annum capacity and it will become 1.75 mn units per annum by FY19. The expansion is taking place in its Gujarat plant, which supplies to Maruti for its Baleno models. Thus SUBROS is making itself ready to serve Maruti's future requirement. Maruti Suzuki volume growth to continue Capacity Utilization to improve going ahead Volume (in thousand) Growth YoY Capacity (in mn units) Utilization Trend 2,500 2,000 1,500 1,000 500 1% 1 9% 14% 1 8% 6% 4% 4% 1.8 1.7 1.6 1.4 1.3 1.2 64% 61% 64% 74% 8 9 8 10 8 6 4 2 Sharp reduction in imported raw materials Car AC component value share Imported Indigenous Compressor HVAC Hose pipe & Tubes Condenser 6 5 4 3 55% 54% 5 45% 46% 47% 51% 49% 4 57% 4 2 35%
Strong cash generation will lead to reduction in debt Return ratios to improve sharply in FY19 Debt to Equity RoCE RoE 1.20 1.00 0.80 0.60 0.40 0.20 1.05 0.89 0.94 0.65 0.43 35% 3 25% 2 5% 1 6% 7% 16% 4% 21% 31% 2 View & Valuation SUBROS is the market leader in the Indian passenger vehicle AC with a market share of approx 4. Maruti Suzuki is the biggest client for the company which contributes 7 of the SUBROS topline. Passenger vehicle industry is set to grow at 101 CAGR for next 34 years, considering the lower car penetration, improving rural income and new launches by OEMs. However, Maruti has set an ambitious target to sell 2 million cars by 2020. Therefore, capacity expansion plan of SUBROS is also on cards inline with Maruti Suzuki which will complete by FY19. The government has mandated Air conditioner or blower facility in M&HCVs from 1st Jan 2018. The company has already tied up with major OEMs and as per management the incremental market for Truck AC is around 250300K trucks per year. The management is also focusing on to increase localization in order to reduce material cost and this exercise can shoot up the gross margin by 350400 bps in next 23 years. The company has also forayed into new business verticals like; Home AC, Refrigerated trucks and Railways segment. Currently, these segments contribute around 78% of total revenues but in next 2 years, the contribution is likely to increase in the range of 152. Based on the strong demand outlook of passenger vehicle industry and new launches by OEMs, we expect Revenue and PAT to grow at CAGR of 17% and 54% respectively, in FY1719E. We expect RoE of 2 in FY19E. Hence we value SUBROS at Rs.297 (17.2x FY19E EPS) and recommend ACCUMULATE rating on the stock.
Financials Snap Shot Income Statement Rs in Crores Key Ratios Y/E March FY16 FY17 FY18E FY19E Y/E March FY16 FY17 FY18E FY19E Revenue from Operation 1,311 1,554 1,858 2,138 ROE 7.1% 12.9% 15. 22. Change (%) 9% 19% 2 ROCE 12.5% 15.6% 21.1% 30.7% Other Operating Income 3 3 9 12 Asset Turnover 1.3 1.4 1.6 EBITDA 152 167 195 254 Debtor Days 27.7 30.8 30.8 30.8 Change (%) 17% 3 Inventory Days 49.2 48.2 48.2 48.2 Margin (%) 1 1 Payable Days 36.1 41.9 41.9 41.9 Dep & Amortization 87 88 84 83 Interest Coverage 1.6 1.9 3.3 5.0 EBIT 66 79 111 171 P/E 22.1 28.3 26.7 15.2 Interest & other finance cost 42 42 34 34 Price / Book Value 1.6 3.6 4.0 3.3 Other Income EV/EBITDA 4.7 8.5 8.7 6.3 EBT 26 40 87 148 Exceptional Item 31 2 Tax 2 (5) 26 45 Assumptions Minority Int & P/L share of Ass. Y/E March FY16 FY17 FY18E FY19E Reported PAT 24 14 59 104 Revenue 1,311 1,554 1,858 2,138 Adjusted PAT 24 14 59 104 Revenue Growth 9% 19% 2 Change (%) 2 4 32 76% COGS (% of Revenue) 67% 69% 71% 7 Margin(%) 1% 5% Capex(Rs crore) 116 90 80 60 Debt (Rs. Crore) 297 329 254 204 Balance Sheet Rs in Crores Cash Flow Statement Rs in Crores Y/E March FY16 FY17 FY18E FY19E Y/E March FY16 FY17 FY18E FY19E Share Capital 12 12 12 12 PBT 26 9 87 148 Reserves 323 337 382 461 (inc)/dec in Working Capital 3 (26) 32 6 Networth 335 349 394 473 Non Cash Op Exp 87 88 84 83 Debt 297 329 254 204 Interest Paid (+) 42 42 34 34 Other Non Current Liab 33 29 29 29 Tax Paid (6) (2) (26) (45) Total Capital Employed 524 507 527 556 others Net Fixed Assets (incl CWIP) 617 646 643 620 CF from Op. Activities 151 111 209 227 Non Current Investments (inc)/dec in FA & CWIP (70) (142) (80) (60) Other Non Current Assets 49 60 60 60 Free Cashflow 82 (31) 129 167 Non Current Assets 49 60 60 60 (Pur)/Sale of Investment Inventory 177 205 245 282 others 0 66 Debtors 99 131 157 180 CF from Inv. Activities (69) (76) (80) (60) Cash & Bank 8 9 14 72 inc/(dec) in NW Other Current Assets 51 98 96 110 inc/(dec) in Debt (30) 10 (75) (50) Current Assets 335 444 512 645 Interest Paid (47) (45) (34) (34) Creditors 130 178 213 245 Dividend Paid (inc tax) (5) (6) (14) (25) Provisions 7 1 10 11 others 7 Other Current Liabilities 200 263 315 362 CF from Fin. Activities (82) (34) (123) (109) Curr Liabilities 336 443 538 619 Inc(Dec) in Cash (0) 1 5 58 Net Current Assets (1) 1 (26) 26 Add: Opening Balance 2 2 9 14 Total Assets 1,001 1,150 1,215 1,324 Closing Balance 2 3 14 72
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