01Feb18 INDUSTRY AUTO ANCILLARY BLOOMBERG SUBR IN BSE Code 517168 NSE Code SUBROS NIFTY 11028 CMP 341 Target Price 375 Previous Target Price 297 Upside 52wk Range H/L Mkt Capital (Rs Cr) Av. Volume (,000) RoE to improve sharply in FY20 442/173 2,050 Key Highlights of the Report: The company reported handsome revenue growth of 2YoY in 3QFY18, primarily driven by strong passenger vehicle sales during the quarter. We expect RoE of 2 and 26% in FY19 and FY20 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 19% and 5 respectively, in FY1720E. Hence, we value SUBROS at Rs.375 (14.2x FY20E EPS) and recommend ACCUMULATE rating on the stock. Financials/Val. FY16 FY17 FY18E FY19E FY20E Net Sales 1,311 1,554 1,844 2,196 2,599 EBITDA 152 167 194 251 321 EBIT 66 79 111 168 243 PAT 24 14 63 105 159 3QFY18 2QFY18 1QFY18 EPS (Rs) 4 2 11 17 27 Promoters 40.0 40.0 40.0 EPS growth (%) 2 88% 41% 65% 5 Public 60.0 60.0 60.0 ROE (%) 7% 16% 2 26% Total 100.0 100.0 100.0 ROCE (%) 16% 21% 29% 36% BV 56 58 66 81 101 Stock Performance % P/B (X) 1.6 3.6 5.1 4.2 3.4 1Mn 3Mn 1Yr P/E (x) 22 28 32 20 13 Absolute 10.4 24.7 89.7 73 PAT Margin improved by 278bps YoY and 60bps QoQ to 3.7% 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. Rel.to Nifty 5.7 18.0 60.9 ABOUT THE COMPANY Subros Ltd (SUBROS) was established in 1985 as a JV between Suri SUBROS NIFTY Group (4 stake), Denso Corporation (technology partner; stake), and Suzuki Motor Corporation ( stake). The company is India s leading manufacturer of automotive AC systems, with a market share of 4. It has four manufacturing facilities in India (Noida, Manesar, Pune, Chennai and Sanand) and has an annual capacity of mn AC kits. 220 200 180 160 140 120 100 Company Data 3 25% 2 5% 6% 7% RoE 16% Shareholding patterns % 80 2 26% 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 Please refer to the Disclaimers at www.narnolia.com
329 360 322 433 373 415 415 497 449 221 244 221 308 254 284 288 355 310 Quarterly Performance Financials 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 YoY % QoQ% FY16 FY17 YoY % Net Sales 373 415 415 497 449 2 1,311 1,554 19% Other Income (0) 0 1 3 4 1138% 49% 3 3 3 COGS 254 284 288 355 310 2 883 1,067 21% Employee Cost 39 40 41 45 48 21% 6% 134 157 17% Other Expenses 38 46 41 43 43 1 1% 142 163 EBITDA 42 46 44 54 48 1 152 167 Depreciation 21 22 21 23 24 1 5% 87 88 EBIT 21 24 23 32 24 1 25% 66 79 2 Interest 10 11 9 10 10 42 42 1% PBT 10 13 14 24 18 79% 26% 26 40 5 Exceptional Item 8 7 1 1 10 31 Tax (1) (1) 3 8 1 22 8 2 (5) 299% PAT 3 7 11 15 16 40 9% 24 14 4 Healthy revenue growth of 2YoY driven by strong PV sales The company reported healthy revenue growth of 2YoY in 3QFY18, 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 YoY during 3QF18. Strong demand for premium segment cars led to this growth. New launches from other OEMs (Tiago and Kwid) have also fared well for the company. EBITDA grew by 1YoY to Rs.48 crores in 3QFY18. Increasing localisation and benefit of operating leverage during the quarter were the main reasons for growth in EBITDA. Interest expense also declined by YoY to Rs.10 crores due to repayment of long term borrowings during the quarter. Tax rate for the quarter stood at Rs.1.47 crore, which was lower due to reduction in investment allowance. Going ahead the tax rate will remain in the tune of 3. PAT grew by 40 YoY to Rs.16 crores in 3QFY18. Net sales trend COGS and Gross Margin trend Net sales Growth YoY COGS Gross Margin 600 500 400 300 200 100 17% 17% 9% 3 29% 2 4 35% 3 25% 2 5% 400 350 300 250 200 150 100 50 3 3 31% 29% 3 3 31% 29% 31% 3 3 3 31% 3 29% 28% 27% 26%
39 40 33 45 42 46 44 54 48 6 8 (1) 5 3 7 11 15 16 Improving Localisation and Operating leverage benefit drives PAT margin in 3QFY18 Margin % 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 YoY(+/) QoQ(+/) FY16 FY17 YoY(+/) Gross Margin 3 3 31% 29% 31% 1.06% 2. 3 31% 1. EBITDA Margin 0.61% 0. 0.9% PAT Margin 1% 2.78% 0.6% 1% 0.9% Gross Margin soared 230bps QoQ to 31% on the back of increasing loaclisation and other cost cutting initiatives taken in 1QFY18. The major raw material for the company are Aluminium and Poly propelene. EBITDA Margin contracted by 61bps YoY and 30bps QoQ mainly due to higher fixed cost on Gujarat Plant which has moved to the second shift during the quarter. PAT margin expanded by 278bps YoY and 60bps QoQ to 3.7%. EBITDA and EBITDA Margin trend PAT and PAT Margin trend EBITDA(Rs. Crore) EBITDA Margin PAT(Rs. Crore) PAT Margin 60 50 40 30 20 10 9% 18 16 14 12 10 8 6 4 2 (2) (4) 1% 1% 1% 1% 1% 1% Concall Highlights: Market share 4 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. Revenue growth guidance for FY19 is around 1517% Radiator business revenue target for FY18 is around Rs.200 crores and for FY19 Rs.240250 crores. Railways Business Revenue: Rs.2025 crores per annum going forward. EBITDA margin can move towards 13.51 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. 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 business can fetch maximum revenues in the tune of Rs.175200 crores. Tax rate 3 for FY18 and FY19. 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. Import content is 4 of sales and the management has plans to reduce it to 2025% in next 23 years. Current capacity utilization is around 9.
1,171 1,155 1,292 1,429 1,569 1,771 1,943 2,113 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 inhouse 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 Volumes (in'000) Growth YoY Capacity (in mn units) Utilization Trend 2,500 2,000 1,500 1,000 500 1% 9% 1 8% 6% 1.8 1.7 1.6 1.4 1.3 1.2 6 61% 6 7 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% 5 5 51% 49% 45% 46% 47% 4 57% 4 2 35%
Strong cash generation will lead to reduction in debt Return ratios to improve sharply in FY20 Debt to Equity RoCE RoE 1.20 1.00 0.80 0.60 0.40 0.20 1.05 0.89 0.94 0.71 0.48 0.33 4 35% 3 25% 2 5% 6% 7% 16% 21% 16% 29% 2 36% 26% View & Valuation SUBROS is the market leader in the Indian passenger vehicle AC with a market share of approx 4. The company has posted handsome revenue growth of over 2YoY to Rs.449 crores in 3QFY18. This growth was mainly driven by robust growth in the passenger vehicle segment. Maruti Suzuki, the biggest client for the company which contributes nearly 7 of the SUBROS topline, has grown by over YoY. However EBITDA margin declined by 60 bps YoY due to higher fixed cost on Gujarat Plant which has moved to the second shift of production in 3QFY18. PAT grew by 40 YoY to Rs.16 crores on account of lower tax expense during the quarter. Going ahead Passenger vehicle industry is set to grow at 10 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 250 300K 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 19% and 5 respectively, in FY1720E. We expect RoE of over 26% in FY20E. Hence we value SUBROS at Rs.375 (14.2x FY20E EPS) and recommend ACCUMULATE rating on the stock.
Financials Snap Shot Income Statement Rs in Crores Key Ratios Y/E March FY17 FY18E FY19E FY20E Y/E March FY17 FY18E FY19E FY20E Revenue from Operation 1,554 1,844 2,196 2,599 ROE 4. 16. 21.6% 26. Change (%) 19% 19% 19% 18% ROCE 15.6% 20.5% 29. 36. Other Operating Income 3 12 17 17 Asset Turnover 1.4 1.7 1.8 EBITDA 167 194 251 321 Debtor Days 30.8 32.0 31.0 31.0 Change (%) 16% 29% 28% Inventory Days 48.2 48.2 48.2 48.2 Margin (%) Payable Days 41.9 55.0 50.0 50.0 Dep & Amortization 88 84 83 78 Interest Coverage 1.9 3.1 4.7 7.4 EBIT 79 111 168 243 P/E 91.1 32.1 19.5 12.8 Interest & other finance cost 42 36 36 33 Price / Book Value 3.6 5.1 4.2 3.4 Other Income EV/EBITDA 8.5 11.2 8.4 6.2 EBT 40 87 149 227 Exceptional Item 31 2 Tax (5) 22 45 68 Assumptions Minority Int & P/L share of Ass. Y/E March FY17 FY18E FY19E FY20E Reported PAT 14 63 105 159 Revenue 1,554 1,844 2,196 2,599 Adjusted PAT 14 63 105 159 Revenue Growth 19% 19% 19% 18% Change (%) 4 355% 65% 5 COGS (% of Revenue) 69% 7 7 68% Margin(%) 1% 5% 6% Capex(Rs crore) 90 84 83 78 Debt (Rs. Crore) 329 280 230 200 Balance Sheet Rs in Crores Cash Flow Statement Rs in Crores Y/E March FY17 FY18E FY19E FY20E Y/E March FY17 FY18E FY19E FY20E Share Capital 12 12 12 12 PBT 9 87 149 227 Reserves 337 385 471 592 (inc)/dec in Working Capital Networth 349 397 483 604 Non Cash Op Exp 88 84 83 78 Debt 329 280 230 200 Interest Paid (+) 42 36 36 33 Other Non Current Liab 29 4 4 4 Tax Paid (2) (22) (45) (68) Total Capital Employed 507 540 576 666 others Net Fixed Assets (incl CWIP) 646 690 669 652 CF from Op. Activities 111 232 178 241 Non Current Investments (inc)/dec in FA & CWIP (142) (127) (61) (61) Other Non Current Assets 60 9 9 9 Free Cashflow (31) 104 116 180 Non Current Assets 60 9 9 9 (Pur)/Sale of Investment Inventory 205 244 290 343 others 66 Debtors 131 162 186 221 CF from Inv. Activities (76) (130) (61) (61) Cash & Bank 9 12 23 102 inc/(dec) in NW Other Current Assets 98 47 56 66 inc/(dec) in Debt 10 (49) (50) (30) Current Assets 444 474 566 742 Interest Paid (45) (36) (36) (33) Creditors 178 278 301 356 Dividend Paid (inc tax) (6) (15) (19) (38) Provisions 1 2 2 2 others 7 Other Current Liabilities 263 59 71 84 CF from Fin. Activities (34) (99) (105) (101) Curr Liabilities 443 516 550 619 Inc(Dec) in Cash 1 2 11 79 Net Current Assets 1 (42) 15 123 Add: Opening Balance 2 9 12 23 Total Assets 1,150 1,197 1,267 1,427 Closing Balance 3 12 23 102
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