SUBROS Ltd. Dec 18, 2017 - hdfcsec.com PCG Pick of the Week... · Subros is supplying close to 60% of the total AC requirement of MARUTI which ... Super Ace LCV from Tata Motors,

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SUBROS Ltd. PICK OF THE WEEK

Dec 18, 2017

Recommendation

Buy at CMP and add on Dips

Add on dips to

Rs. 264-245

Target

Rs. 318

Time Horizon

4 Quarters

Industry

AUTO

CMP

Rs. 264

Subros Limited, founded in 1985, is a joint venture public limited company with 40% ownership by Suri family of

India and 13% ownership each by Denso Corporation & Suzuki Motor Corporation of Japan. The company deals

with manufacturing thermal products for automotive applications in technical collaboration with Denso. Their main

product base includes compressors, condensers, heat exchangers and all connecting elements required to complete

AC loop. Subros cater to most segments viz. Passenger Vehicles (PV), buses, trucks, refrigeration transport, off-

roaders and railways. Their main clientele includes: Maruti Suzuki, TATA Motors, Mahindra & Mahindra, Force

motors, Ashok Leyland, Nissan, Indian railways etc.

We recommend Subros as BUY at CMP of Rs. 264 and add on declines at Rs. 245 for the target of Rs. 318 in the

time frame of 4 Quarters.

Investment Rationale:

Strong Clientele Base

Subros manufactures compressors, condensers, HVAC (heating, ventilation, and air conditioning) and all

connecting elements required to complete the AC loop. It caters to all major segments viz. PVs, buses, trucks,

refrigeration transport, off- roaders & railways. Their main clientele include: Maruti Suzuki, TATA Motors, Mahindra

& Mahindra, Force motors, Ashok Leyland, Nissan, Whirlpool for home ACs and Indian railways.

Subros is supplying close to 60% of the total AC requirement of MARUTI which entails ~80% of Subros’ revenue.

Subros is having all three high selling models, Baleno, Brezza and Ignis under its belt and enjoys most from

MARUTI’s gain. MARUTI has outperformed the passenger vehicle industry in FY17 (320bps market share gain in

past 3 years).

Apart from MARUTI, the company also supplies ACs to other high selling models like Kwid (Renault), KUV 100

(M&M), and Tiago (Tata Motors).

Recently the company tied up with Renault to supply condenser in Brazil. Currently Renault sells ~ 0.3mn cars in

Brazil.

FUNDAMENTAL ANALYST

Nisha Sankhala

[email protected]

HDFC Scrip Code SUBLTD

BSE Code 517168

NSE Code SUBROS

Bloomberg SUBR IN

CMP as on 15 Dec’17 264

Equity Capital (Rs mn)

120

Face Value (Rs) 2

Equity O/S (mn) 60

Market Cap (Rs mn) 15717

Book Value (Rs) 58

Avg. 52 Week Vol 88330

52 Week High 290

52 Week Low 132

Shareholding Pattern (%)

Promoters 40.0

Institutions 34.3

Non Institutions 25.7

PCG Risk Rating* Yellow

* Refer Rating explanation

mailto:[email protected]

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Dec 18, 2017

Well poised to ride the PV recovery

With general slowdown in the economy and higher Inflation, Indian PV has experienced almost no growth

kind of situation between FY11-14 but since last 3 years the PV sales has grown at quite a significant rate.

Last year the sales of Passenger Vehicles grew by 9.2% YoY and within PV, Passenger Cars, Utility Vehicles,

and Vans grew by 3.8%, 29.9% and 2.3%.

We believe Indian PV sales will grow above 10% CAGR over the next 5 years. We expect strong sales of

newly launched models Baleno, Brezza, Ignis (Maruti), Kwid (Renault), KUV 100 (M&M) and new launches

in coming months to continue to drive growth for PV incumbents in FY18. Major launches are expected in

the form of Hexa, Kite and Nexon by Tata Motors and refreshes of Swift and Baleno.

Market leader in the Indian auto air-conditioning segment, with 35% market share in automotive AC,

Subros is well poised to ride the growth.

Figure 1ufuyut

KEY HIGHLIGHTS

Subros ‘s main product base

includes compressors,

condensers, heat exchangers

and all connecting elements

required to complete AC loop.

Subros cater to most segments

viz. PV, buses, trucks,

refrigeration transport, off-

roaders and railways. Their

main clientele include: Maruti,

TAMO, M&M, Force, Ashok

Leyland, Nissan, Indian

railways etc.

We expect Subros to clock

revenue CAGR of 17% over

FY17-20E aided by a recovery in

the PV industry and strong

growth in other key segments

into bus/truck, railway, home

AC, radiators and Condenser

segments.

Subros’ margins are expected to

improve owing to increased

localization and operating

leverage. We also expect the

company’s interest costs to

recede, given the reduction in

the debt levels.

We Recommend Subros BUY at

CMP of Rs. 264 and add on

decline of Rs. 245 for the target

of Rs. 318 in the time frame of 4

Quarters.

Volume Started Picking UP

Source: Company, HDFC sec Research

(in mn)

Indian PV sale is

expected to

grow at 10%

CAGR over next

5 years

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Dec 18, 2017

Entry into untapped areas, opening up larger opportunities

The Company’s entry into bus/truck AC, transport refrigeration (cold chain) and railway offers large

incremental opportunities, which will in-turn, contribute to meaningful revenue over the next 3-5 years.

Preference for AC buses is rising: Rising urbanization and growing infrastructure is creating a big

market for buses. AC buses are no longer looked upon as costly alternatives compared to conventional non-

AC buses. Travellers are ready to pay for comfort and state transport undertakings and city bus

undertakings are warming up to the prospect of AC buses in their fleet. Schools and colleges away from

the city are seeing an exponential rise in the number of new extensions, and the demand for high-end AC

school buses is growing rapidly.

Mandatory AC cabin for trucks: As per the notification from the Ministry of State for Road Transport,

ACs or blowers are mandatory in trucks from Jan-18. As per management, total market opportunity from

this (assuming 50:50 AC and blower volume) would be Rs. 1.75bn.

Refrigerated vehicles-Growing segment: Company provides a complete range of transport refrigeration

solutions suitable for storage volume of upto 50 cu.m. The company is currently sourcing the chassis of the

Super Ace LCV from Tata Motors, fitting the refrigerated container on it and supplying it back to the OEM.

The company has also tied up with Ashok Leyland for Dost and M&M for Bolero. The company expects

revenue size of this business to increase to Rs 400mn in the next two years. This segment has slightly

better margins (12-13%) vs. the existing business.

Railways: Subros has made entry in Indian Railways with development of import substitute for driver cabin

AC for diesel locomotives. Currently, the Company has two order for ~Rs250mn from Diesel Locomotive

Works (DLW), Varanasi. And recently also company won order worth Rs100mn from Indian railway. The

company expects more such regular orders to flow in from the Indian Railways.

Maruti’s new plant in Gujarat

In Q4FY17, company commenced supplies of ACs for the Maruti Suzuki Baleno in the Gujarat plant from its

Sanand plant. Realizing the business potential the company is also looking to set up second new

manufacturing facility there by 2HFY19. Overall capacity utilization has reached to 90%.

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Dec 18, 2017

New Business has strong potential

Radiator business: The Company is supplying radiators to Maruti through Denso. Capex for Radiator

segment was Rs 250mn in FY16 and management has indicated additional Rs 350mn capex for additional

capacity. Management also expects revenue of Rs 2bn in FY18E (Rs 1bn was in 1H).

Home AC segment: Subros is getting into new segment of Home AC via application development of heat

exchangers for this segment. They are in discussions with major lead manufacturers of home ACs for

exploring business opportunities and are in advance stages of product development & approvals to

commence supplies with some of them.

View & Valuation:

Post the fire accident at their Manesar plant, the company had filed Insurance for Rs. 3700 Mn out of which

Rs. 1630Mn has been claimed and the rest will get passed based on total reinstatement costs. Profitability

of Subros in FY17 impacted by extra-ordinary expenditure (Rs 243mn) pertaining to re-instatement of

facilities

We expect Subros to clock revenue CAGR of 17% over FY17-20E aided by a recovery in the PV industry

and strong growth in other key segments into bus/truck, railway, home AC, radiators (supply to Denso)

and Condenser (supply to Whirlpool) segments. Also, margins are expected to improve owing to increased

localization and operating leverage. We also expect the company’s interest costs to recede, given the

reduction in the debt levels. We forecast 49% PAT CAGR over FY17-20E. The stock is trading at 19.6x/14x

of FY19E/FY20E EPS.

We recommend Subros as BUY at CMP of Rs. 264 and add on declines of Rs. 245 for the target of Rs. 318

in the time frame of 4 Quarters.

Risk & Concerns:

Slowdown in economy

Volatility in raw material prices

Highly dependent on few Customers

Currency Fluctuations

Cv ac/blower regulation was delayed once from 1st April 2017 to 1st Jan 2018, so it can be

delayed further.

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Dec 18, 2017

Five Quarters At A Glance

18% CAGR Over FY17-20E


Operational Efficiencies to bring down Expenses


Reducing Debt And Interest Cost


Improvement In Return Ratios From FY18


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Dec 18, 2017

Falling Share of Revenue From PV Segment


Revenue Break-up


Subros Auto AC Capacity Utilization On Uptrend


Increasing Revenue Base of New Verticals


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Dec 18, 2017

Income Statement

(Rs mn) " FY16 FY17 FY18E FY19E FY20E

Net Revenues 13,069 15,495 18,744 21,855 24,810

Growth (%) 9.2 18.6 21 16.6 13.5

Material Expenses 8,840 10,709 12,840 14,796 16,722

Power & Fuel expenses 237 - 319 372 447

Employee Expenses 1,262 1,539 1,743 2,120 2,332

Other Operating Expenses 1,208 1,577 1,734 2,032 2,334

EBITDA 1,521 1,671 2,109 2,536 2,975

EBITDA Margin (%) 11.6 10.8 11.2 11.6 12

EBITDA Growth (%) 11.2 9.8 26.2 20.3 17.3

Depreciation 864 879 1,026 1,098 1,170

EBIT 657 791 1,083 1,438 1,806

Other Income (Incl. EO Items) 24 -277 45 48 52

Interest 417 422 431 377 319

PBT 264 92 697 1,109 1,539

Tax (Incl. Deferred) 24 -49 153 299 415

RPAT 240 141 543 810 1,123

EO (Loss)/Profit (Net of Tax) - -200 - -

APAT 240 341 543 810 1,123

APAT Growth (%) 18.1 42.1 59.3 49 38.7

Adjusted EPS (Rs) 4 5.7 9.1 13.5 18.7

EPS Growth (%) 18.1 42.1 59.3 49 38.7


Balance Sheet


SOURCES OF FUNDS

Share Capital - Equity 120 120 120 120 120

Reserves 3,234 3,338 3,745 4,353 5,195

Total Shareholders’ Funds 3,354 3,458 3,865 4,473 5,315

Long Term Debt 2,898 2,669 2,469 1,969 1,469

Short Term Debt 1,083 1,707 1,720 1,660 1,600

Total Debt 3,980 4,376 4,189 3,629 3,069

Net Deferred Taxes 295 246 211 215 220

Long Term Provisions & Others 102 93 93 93 93

TOTAL SOURCES OF FUNDS 7,731 8,172 8,358 8,409 8,696

APPLICATION OF FUNDS

Net Block 5,740 6,263 5,997 5,899 5,729

CWIP 449 200 222 200 180

LT Loans & Advances 466 587 504 504 504

Total Non-current Assets 6,680 7,075 6,748 6,628 6,438

Inventories 1,766 2,052 2,157 2,515 2,923

Debtors 986 1,302 1,181 1,377 1,699

Other Current Assets 507 984 1,088 1,232 1,343

Cash & Equivalents 70 83 286 302 399

Total Current Assets 3,328 4,421 4,712 5,426 6,364

Creditors 1,293 1,786 1,789 2,115 2,369

Other Current Liabilities &Provns 985 1,539 1,312 1,530 1,737

Total Current Liabilities 2,278 3,324 3,101 3,644 4,106

Net Current Assets 1,050 1,097 1,611 1,782 2,258

TOTAL APPLICATION OF FUNDS 7,731 8,172 8,358 8,409 8,696


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Dec 18, 2017

Key Ratios


Reported PBT 264 92 697 1,109 1,539

Interest expenses 417 422 431 377 319

Depreciation 864 879 1,026 1,098 1,170

Working Capital Change 17 -123 -105 -155 -380

Tax Paid (57) - (188) (295) (411)

Other operating Items - -

OPERATING CASH FLOW ( a ) 1,505 1,271 1,860 2,134 2,236

Capex (751) (1,153) (781) (978) (980)

Free cash flow (FCF) 755 118 1,079 1,156 1,256

Non-operating Income - - - -

INVESTING CASH FLOW ( b ) (751) (1,153) (781) (978) (980)

Debt Issuance/(Repaid) (288) 395 (187) (560 (560)

Interest Expenses (417) (422) (431) (377) (319)

FCFE 49 91 461 219 377

Share Capital Issuance - -

Dividend (48) (78) (136) (202) (281)

FINANCING CASH FLOW ( c ) (753) (105) (877) (1,140) (1,160)

NET CASH FLOW (a+b+c) 1 13 202 16 97

EO Items, Others 69 70 83 285 302

Closing Cash & Equivalents 70 83 285 302 398


Key Ratios


PROFITABILITY (%)

GPM 32.4 30.9 31.5 32.3 32.6

EBITDA Margin 11.6 10.8 11.2 11.6 12

APAT Margin 1.8 2.2 2.9 3.7 4.5

RoE 7.4 10 14.8 19.4 22.9

RoCE 8 8.8 10.6 12.9 15.9

EFFICIENCY

Inventory (days) 49.3 48.3 42 42 43

Debtors (days) 27.5 30.7 23 23 25

Payables (days) 36.1 42.1 34.8 35.3 34.9

Cash Conversion Cycle (days) 27.4 23.9 25.8 24.7 27.4

Debt/EBITDA (x) 2.6 2.6 2 1.4 1

Net D/E (x) 1.2 1.2 1 0.7 0.5

Interest Coverage (x) 1.6 1.9 2.5 3.8 5.7

PER SHARE DATA (Rs)

EPS 4 5.7 9.1 13.5 18.7

Dividend 1.6 1.3 2.3 3.4 4.7

Book Value 55.9 57.6 64.4 74.6 88.6

VALUATION

P/E (x) 66 46.3 29 19.6 14.1

P/BV (x) 4.7 4.6 4.1 3.5 3

EV/EBITDA (x) 13.1 12.1 9.4 7.6 6.3

EV/Revenues (x) 1.5 1.3 1.1 0.9 0.8

Dividend Yield (%) 0.6 0.5 0.9 1.3 1.8


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Dec 18, 2017

Rating Chart

R E T U R N

HIGH

MEDIUM

LOW

LOW MEDIUM HIGH

RISK

Ratings Explanation:

RATING Risk - Return BEAR CASE BASE CASE BULL CASE

BLUE LOW RISK - LOW RETURN STOCKS

IF RISKS MANIFEST PRICE CAN FALL 20% OR MORE

IF RISKS MANIFEST PRICE CAN FALL 15%

& IF INVESTMENT RATIONALE

FRUCTFIES PRICE CAN RISE BY 15%

IF INVESTMENT RATIONALE

FRUCTFIES PRICE CAN RISE BY 20% OR

MORE

YELLOW MEDIUM RISK - HIGH RETURN STOCKS






FRUCTFIES PRICE CAN RISE BY 35% OR

MORE

RED HIGH RISK - HIGH RETURN STOCKS







OR MORE

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Dec 18, 2017

120

140

160

180

200

220

240

260

280

300

Closing Price

Rating Definition:

Buy: Stock is expected to gain by 10% or more in the next 1 Year. Sell: Stock is expected to decline by 10% or more in the next 1 Year.

11 | P a g e


Dec 18, 2017

Disclosure: I, Nisha Sankhala, MBA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or her relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock –NO HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HSL or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes without prior written approval of HSL. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HSL may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HSL and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HSL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. HSL and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this report.

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SUBROS Ltd. Dec 18, 2017 - hdfcsec.com PCG Pick of the Week... · Subros is supplying close to 60% of the total AC requirement of MARUTI which ... Super Ace LCV from Tata Motors,

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