Best proxy to PV and CV recovery - i.marketsmojo.com

LKP Research

Best proxy to PV and CV recovery

Subros is the largest automotive air conditioning systems company in India with >40% market

share in the domestic passenger vehicle industry, supplying mainly to MSIL and other players

like M&M, TAMO and Renault Nissan. It also supplies air conditioning systems to commercial

vehicles (MS -70%), railways (MS – 77%), home AC, Engine Cooling Modules (ECM), buses and

reefers. With strong demand in non PVs segment, Subros has been de-risking its business

model by reducing its dependence on subdued PV segment as witnessed in Q1 FY20, where the

non PVs have contributed 27% of topline up from 13% in FY17. Subros’ continuous efforts for

indigenization of raw materials, cost optimization, modification of processes and advantage of

operating leverage are expected to bring a 50 bps improvement in margins in FY21E over a low of

FY20E. The company is done with its major capex and hence will be accompanied by high Asset

To Turnover ratio (1.5x in FY21E), improvement in margins and higher FY21E ROCE (18.3%). We

expect revenues CAGR of 7% and PAT CAGR of 24.4% between FY19-21E and recommend a BUY

with a target price of ₹303.

SUBROS | Auto and Auto Components

Stock Data

FV (₹) 2

Market Cap Full (₹ bn) 16

52-Week Range (₹) 364 / 164

BSE / NSE Code 517168 / SUBROS

Reuters / Bloomberg SUBR.NS / SUBR IN

Rating Buy

Current Market Price(₹) 241

12 M Price Target (₹) 303

Potential upside (%) 26

Shareholding Pattern (June 2019)

Relative Price Performance rebased to 100

Revenue mix - Q1 FY20YE Mar FY 18 FY 19 FY 20E FY 21E

Total sales(₹ bn) 19.1 21.2 19.7 23.9

EBITDA margins (%) 11.0% 10.7% 10.5% 11.0%

PAT margins (%) 3.2% 3.6% 5.0% 4.9%

EPS(₹) 9.5 12.1 11.8 17.8

P/E (x) 25.3 19.9 20.4 13.5

P/BV (x) 3.9 2.3 2.1 1.8

EV/EBITDA (x) 29.0 25.8 27.8 21.5

ROE (%) 15.4% 11.7% 10.1% 13.4%

ROCE (%) 20.7% 19.2% 14.7% 18.3%

Initiating CoverageSeptember 24, 2019

Ashwin Patil | [email protected]+91 22 6635 1271

Subros to benefit from any recovery happening in the PV industryThe PV segment comprised 73% of total revenues in Q1 FY19, out of which about 72% was

contributed by MSIL. The other customers are M&M, Tata Motors and Renault Nissan. Subros

supplies to all the major successful models such as the Baleno, Brezza, Wagon R, Ertiga, Kwid,

Tiago, Nexon, Tigor, Marazzo etc. Despite a major slowdown in the auto industry, and multiple

headwinds for the industry, we believe GOI’s taxation reforms, good rainfall and expected good

festive season may bring some ray of hope for the PV industry. MSIL being the market leader and

Subros being the key supplier to all the major models of the company, stands to benefit maximum

from any recovery happening in the sector.

Increasing revenue proportion from non PV verticals to provide a good business mixSubros is gaining traction from the Non PV businesses such as Home AC, Trucks & buses, Railways,

reefers etc. This proportion has reached 27% in Q1 FY20 and management expects it to reach 40%

in medium term. The Ministry of Road Transport and Highways in 2018 made it mandatory to install

AC/blowers in cabins of MHCVs. This provided a very good opportunity for Subros who already had

a good relation with the OEMs. Subros gained a 70% market share in it and is now a major supplier

to all the OEMs. Subros manufactures radiators for Denso Corp and MSIL. Furthermore, Subros

also supplies to trains, metro coaches, buses and reefers. These businesses were at nascent stage

till a year ago, but now form a major chunk in Subros’ topline and are expected to expand well

further.

Margin improvement to be supported by indigenization of RM and operating leverageSubros’s continuous efforts to localize RM sourcing have resulted in a drop in import content. The

company is working on strategies to improve margins significantly from current levels through –

1). Cost optimization with modification of processes 2). Increase in capacity utilization which in

turn would fetch operating leverage benefits 3). Backward integration for high-value components.

20

40

60

80

100

120

Sep-18 Nov-18 Feb-19 Apr-19 Jun-19 Sep-19

Subros BSE Sensex

Car AC73%

Radiator (ECM)11%

CVs, Reefers etc5%

Home AC11%

Promoter37%

Denso Corp20%

Suzuki Motor Corp12%

MF7%

FII's1%

Others23%

Subros | Initiating Coverage

LKP Research 2

Company backgroundIncorporated in 1985, Subros is a joint venture (JV) company with 37% ownership by Suri family, 20%

by Denso Corporation (Denso) and 12% by Suzuki Motor Corporation (SMC). Subros, in technical

collaboration with Denso (a Japanese auto components maker), is an integrated manufacturer and

market leader for auto air-conditioning units. It is engaged in manufacturing of thermal products

such as compressors, condensers, heat exchangers and all connecting elements required to

complete AC loop for automotive applications.

It caters to all major automotive segments i.e. passenger vehicles (PV), commercial vehicles (CV;

Trucks, Buses & Refrigerator transport), Off-roaders and Railways. It also entered into Home AC

segment in FY17 and has gained a strong footmark in this segment off late. The PV segment is its

primary segment, contributing 72% to the overall revenues while the non-PV segment contributes

~28%. Subros enjoys 42% market share in the PV segment in FY19, (which has moved up to 45% Q1

FY20) with Maruti Suzuki (MSIL) being its major client. M&M, Tata Motors, Renault are among its

other major clients in the PV industry.

Subros has eight plants across India – 2 each at Manesar and Noida (North), one at Pune and two in

Gujarat including a Greenfield plant at Karsanpura (West) and one in Chennai (South), with a total

current capacity standing at 2.25 million AC kits. It also has a technical center in collaboration with

Denso and a tool manufacturing center in Noida.

Source: Company, LKP Research


LKP Research 3

PASSENGER VEHICLE

Compressors

COMMERCIAL AC

RESIDENTIAL AC WATER DISPENSER (HOT & COLD)

BUS AC RAIL AC

Condensers Tubes & Hoses

TRUCK CABIN AC SYSTEM OFF-ROADER AC TRANSPORT REFRIGERATION SYSTEM

HVAC (Heating, Ventilation & Air Conditioning systems)

Products



LKP Research 4

PASSENGER VEHICLE SEGMENT

COMMERCIAL VEHICLE SEGMENT

TRANSPORT REFRIGERATION SYSTEM TOOLING

INDIAN RAILWAY SEGMENTz HOME AC SEGMENT

Clientele

Clientele wise break up - Q1 FY20 PV market share- FY19

* Others comprises of Denso (10%), Dowoon (5%) mainly

Source: SIAM, LKP Research Source: SIAM, LKP Research

Maruti72%

Others28%

Subros42%

Hanon System16%

Sanden Vikas13%

Mahle Behr8%

Calsonic Motherson

3%

Others18%



LKP Research 5

Investment ArgumentDespite short term worries, long term aspects of the PV industry remain intactThe automobile industry has been staring at an imminent breakdown as sales of PVs hit a slow lane

of growth ever since the NBFC crisis in October 2018 . The episode has led to tight liquidity condition

for automobile financiers as cash strapped NBFCs were forced to slam breaks on fresh lending. With

vehicle loans turning dearer and hard to come, consumers have started putting off their decision to

buy vehicles.

Going forward, this crisis is likely to persist for a longer period considering the fact that internal

factors like new launches alone will not be able to restart the growth engine of the sector. But the

corporate tax cuts, easing of stringent lending norms by NBFCs along with easy availability of finance

(~80% of cars and ~100% of trucks are bought through financing) will help the sector to kick start

its growth engines. Also steps such as BS VI pre-buying, reduction in registration and insurance

costs and the announcement of a meaningful scrappage policy sooner than later may help revive

the sector.

On the positive side, low base of H2 last year, good 2019 monsoons and increase in rural income

may lead to a recovered festive season demand and aid improvement in sentiments in second

half. We expect FY20E to register negative growth for the PV sector as YTD August PV sales have

registered 23% drop. However, as we expect second half to be better than first half, the full year

growth is expected to be better than the YTD August rate. We expect economy to improve and

sectoral positives to pan out well in FY21E, thus reporting at least 6-7% growth in the sector.

Being a main supplier to MSIL strengthens the case even in challenging market environmentMSIL is one of the largest PV manufacturers in India with market share of >50% in FY19. We believe it

would continue to be the biggest beneficiary despite challenging environment, given its stronghold

in the entry-level segment and petrol segment, which is a better option in BS VI regime. Furthermore,

its new launches targeted towards filling gaps in its portfolio would improve the overall product

mix and drive growth, mainly in FY21E. Additionally the wide portfolio and the launches that the

company comes up gain a good deal of market share too. We estimate MSIL to post negative growth

in FY20E while the pent up demand is expected to go up in FY21E.

PV industry Volumes (‘000 units) MSIL growth vis-a-vis industry growth

Source: Company, LKP Research Source: Company, LKP Research

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20EFY 21E

PV indsutry volume growth (%)

MSIL volume growth (%)

2,52

0

2,63

0

2,66

5

2,50

4

2,60

1

2,78

9

3,04

7

3,28

8

3,37

7

3,03

9 3,34

3

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY20E

FY21E


LKP Research 6

Subros – Best proxy on the MSIL’s growth storyIn FY19, Subros supplied ~ 72% of the total AC requirement of MSIL, catering to all the highest selling

models i.e. Baleno, Brezza, Swift, Dzire, Ignis, etc. Besides petrol, it started providing ACs to diesel

variants from FY16 onwards, which led to increase in business with MSIL from 65% in FY16 to 72%

currently. Diesel cars account for nearly 30% of MSIL’s total sales volume. With MSIL being the top

revenue contributor (72% of PV segment revenues) for Subros, we expect it to benefit the most

from former’s out performance to PV industry growth. We are aware that the PV industry is going

into down turn, but in comparison with the industry, still the market share of MSIL is maintained at

52-53%, which indicates that MSIL is de-growing at a pace not higher than the industry. In Q1 FY19,

Subros’s market share in PV has moved up to 45% on the back of winning orders for the refreshed

Wagon R and Ertiga platforms and Renault Nissan’s exports. Subros will also supply to the newly

launched XL6, upcoming launch of S-Presso and all the new model launches of MSIL till FY21E.

Subros focused on gaining business from other PV players tooApart from MSIL, Subros supplies components to other PV manufacturers like M&M (30% Share

of Business or SoB), Renault-Nissan (20%) and TAMO (35%). Last year it tied up with Renault to

supply condensers in Brazil, where Renault sells ~ 0.3mn cars. Over the last 3 years, it has been

able to increase its SoB with M&M and Renault as well besides MSIL. Thus with SoB improving

across OEMs, its overall market share in the PV industry has augmented to ~42% in FY19 from

34%/37%/40% in FY16/FY17/FY18. It further aims to increase its SoB with these other OEMs, in

order to improve its revenue mix and expand its overall market share in the PV industry. While,

MSIL would continue to contribute significantly to Subros revenue, the robust sale of existing and

new models (Kwid, KUV 100, Tiago, Hexa, Nexon, Marazzo etc.) by these other OEM’s would drive

growth for Subros. Furthermore, the company would like to reduce its dependence on MSIL to de-

risk its business model.

Radiators business to flourish further on EV wave and Denso increasing its shareIn 2014, Subros entered into MoU with Denso to supply global standard cooling modules (radiators)

to them, which they in turn supply to Suzuki Motors and M&M. Radiators are the heat exchangers

used to transfer thermal energy from one medium to another for cooling and heating. With the

initial investment of ₹250mn in FY16, it installed 0.50mn capacity p.a. at its existing Manesar plant

and further increased it to 0.75mn by FY17. The supply started from March 2016, but was halted

due to a fire incident at the plant in May 2016. It resumed from January 2017, post the repair

work. FY18 being its full year of production, management generated revenue of ~₹2.2bn in that

year, while it grew by 29% in FY 19 to ₹2.85 bn. We estimate revenue CAGR of 8% over FY19-

21E to INR3.3bn from this segment. Due to minimal investment incurred in setting up the radiator

production line, we expect this segment to boost profitability and improve return ratios. Recently

MSIL market share growth trend (%)

Source: SIAM, LKP Research

45%

38% 39%42%

45%47% 47%

50%51% 52% 53%

30%

35%

40%

45%

50%

55%

FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20E FY 21E

MSIL's domestic market share


LKP Research 7

Regulatory compulsion to trigger CV business growthAs per the notification from Ministry of Road Transport and Highway, ACs or blowers are mandatory in N2 and N3 category of trucks (3.5 tonnes and above) from January 2018. Few OEMs had already been offering AC cabins in their CVs but the market for it was extremely low. With this notification coming in, demand for AC/blower in truck cabin has risen extensively. Currently, the majority of the customers have opted for blowers as it’s one-fourth the cost of AC and only a few customers have chosen AC fitment as an optional action.

After the notification, Subros leveraged its existing strong relations with the OEMs and acquired

~70% market share in the truck cabin AC/ blower space in no time. After this regulation, it received

orders to supply 2.4 lakh units annual from the OEMs such as Ashok Leyland (supplying 90% of

blower requirement), Tata Motors (75%), M&M (100%) & Swaraj Mazda Isuzu (100%) in the blower

space and Daimler (30%) in the AC space. The above requirement was catered through its existing

Chennai and Pune plants where it had earlier invested ₹250mn (capacity of 300,000 units p.a.) for

adding the truck business. Its key competitors with approximate market shares are Sanden (16%

market share), Bergstorm (6%), Air International (5%), Mahle Behr (2%) & others. In FY19, Subros

earned 5% of its revenues from CVs business at ₹1.05 bn, and is expected to earn more post CV

recovery.

ECM revenues trend (₹ mn)


25

2,200

2,850 3,135

3,292

-

500

1,000

1,500

2,000

2,500

3,000

3,500

FY 17 FY 18 FY 19 FY 20E FY 21E

Truck revenues trend (₹ mn) Truck market share trend (FY19)


480

680

1,050 1,221

1,423

-

200

400

600

800

1,000

1,200

1,400

1,600

FY 17 FY 18 FY 19 FY 20E FY 21E

Subros, 70%

Sanden, 16%

Bergstorm, 6%

Air International, 5%Mahle Behr, 2%

Others, 1%

Denso increased its stake from 13% to 20% which would further bring Next-Gen technology for this

business and help it to flourish further. Also the EV wave which is the future of the auto sector, will

increase the content per vehicle from this business as EVs would require high power battery cooling

module. We believe Subros is well prepared to fetch the advantages of future technologies due to

its much closer collaboration with Denso.


LKP Research 8

Subros’s newer ventures contributing meaningfully to its topline1). Railways- Subros entered the Railway segment in FY14 by developing import substitute for driver cabin AC for diesel locomotives. Currently, it caters to only driver cabin AC with market share of ~77%. Its key competitors are Cool Air (10% market share), Lloyd Electric & Engineering (7%) and Sidwal Refrigeration Industries (6%) Pvt. Ltd. Couple of years back, the company got shortlisted by two major Tier 1 suppliers of Indian Railways i.e. Bombardier India and Medha Servo Drives Pvt Ltd. They have engaged with Subros for future projects with Integral Coach Factory (ICF), Chennai. As part of this engagement, both the companies have awarded trial orders to Subros. This opportunity has provided strong business growth in this segment. Apart from this, Subros also plans to enter railway coaches and evaluate opportunities in metro AC coach segment. Currently, majority of AC’s are imported from China, Korea and Australia in this space. Subros targets to achieve 25% market share in railway coaches and 10% market share in metros. It expects to generate INR1bn revenue by FY21, which was ₹200 mn in FY 19.

2). Home AC - Subros forayed into the Home AC segment in FY17 by supplying 50k condensers to Whirlpool. It is looking to tie up with other players and currently added E-Durables as its client which is one of the largest and fully backward integrated OEM service provider in India, catering to clients like LG Electronics, Haier, Voltas etc. In Q4 FY19, the company acquired Zamil Air Conditioners India Ltd (Zamil) for ₹115 mn to manufacture home air conditioning systems. Through this initiative, Subros has created capacity of 0.5 mn units per year to reach and supply home AC supply to various OEMs such as Voltas, Havells, Whirlpool and E-Durables. In a very short period of time, Subros has made strong inroads into the Home AC industry and now contributes 11% of the topline in Q1 FY20 with revenues of ₹620 mn. Management expects this business to contribute ~₹1.25 bn in FY 20E. Though the EBITDA margins of this business are lower compared to PV AC segment, increase in utilization rates (currently 60%) may lead to improvement in margins. The strategy to broad base the revenue mix is enabling Subros counter the slowdown in auto segment. Management expects the non auto business which contributed 27% in Q1 FY19 to reach 40% in the medium term on the back of traction observed in the robust Home AC segment.

3). Aftermarkets - Subros will focus more on aftermarket in the coming years. So far the company treated aftermarket business as only a support system for OEM business. But with 90 dealers across the country, the company aims to increase its contribution from aftermarket to the total business from 4% currently.

4). Other verticals –In the buses segment, Subros is a 100% supplier to Force Motors for its Traveller AC buses, ranging from a load of 4kw to 8kw. It has also launched a 45kW AC for low floor city bus application. Though the demand for AC bus is at nascent stage currently, it is expected to grow at a good pace over the next 3-4 years. Subros is keen to secure business from State Transport Undertakings (STUs) as most of them are expanding their AC bus fleet.

Railways segmental revenues trend (₹ mn) Railways market share (FY19)


Subros77%

Cool Air10%

Lloyd Electricals7%

Sidwal Refrigeration Inds6%

45

150

200

267

351

0

50

100

150

200

250

300

350

400

FY 17 FY 18 FY 19 FY 20E FY 21E


LKP Research 9

Home AC revenue trend (₹ mn)


10 50 102

1,300

2,200

-

500

1,000

1,500

2,000

2,500

FY 17 FY 18 FY 19 FY 20E FY 21E

In the Reefers segment, Subros entered the reefers segment in FY14 anticipating huge demand.

But the segment did not grow for the company as the market still remains unexploited. However it

has set-up a plant in Greater Noida to manufacture the complete body of the truck along with the

AC kit to provide a ready solution to retailers and cold chain suppliers. Earlier clients used to get

a chassis, source the AC kit from Thermoking or Carrier and then get the body built. Despite the

slow movement in the refrigerated truck segment, the company is anticipating good demand in the

coming years which would be fueled by the entry of multinational large retail chains.

Indigenisation of RM costs, changing revenue mix and operating leverage to improve marginsDespite auto industry slowing down, we believe Subros will report improving margins on the back

of 1). Focusing on diversifying into non PV business. Currently Home AC is reporting lower margins.

However this business looks very promising looking at the significant jump in Q1 FY20 revenues

coming from this segment. Viewing this, we believe that utilization rates in this business should

improve from current 60%, thus improving volumes and margins. 2). it aims at reducing the import

content of raw material to 25% from 35% in FY19 (already down from 60% in FY13) and bring raw

material cost down to 65% by FY21 from 69.9% in FY19 (was 71.7% in FY13). In an attempt to reduce

imported content, Subros opened a new plant – Subros Tool Engg Centre (STEC) in Noida in 2014

to address captive tool and mold requirements. It specializes in high-tech, niche tooling to meet

specialty tools requirements. & 3). As and when the auto sector revives, we expect the segment to

offer operating leverage with the overall utilization rates moving northwards.

Proportion of indegenous RM content(%) Margins trend (%)


46% 47%49%

57%

62%65%

30%

35%

40%

45%

50%

55%

60%

65%

70%

FY 14 FY 15 FY 16 FY 17 FY 18 FY 19

Proportion of indegenous RM content(%)

11.2%11.4%

11.6%

10.9% 11.0%

10.7%

10.5%

11.0%

9.8%10.0%10.2%10.4%10.6%10.8%11.0%11.2%11.4%11.6%11.8%

FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20E FY 21E


LKP Research 10

Major capex phase is over, return ratios to improve in FY21Subros has 6 facilities in 5 locations across India : Noida, Pune, Chennai, Manesar and Sanand. The Sanand plant in Gujarat has already started production for Suzuki Motors and Tata Motors, for models such as Baleno, Brezza, new Swift, Tiago, Tigor, Nexon etc. The current capacity of Subros stands at 2.25 mn including the 0.75 mn units at the Phase ! of the new Karsanpura plant in Gujarat. The overall capacity utilization currently stands at 65-70%, lower from 80% in FY 18, in line with the

weak auto sector environment.

Plants Products Manufactured Customers

NoidaCompressors, Heat Exchangers, Pressure Dye

Casting,Press Shop, Injection Molding (Small Parts) All OEM's

Manesar Car ACs, ECM Products MSIL

Pune Car & CV ACs TAMO & M&M

ChennaiCar & CV Acs, Rail Acs,ECM / Acs, Bus ACs,Truck

Refrigeration Systems, Home AC Condensers

Force Motors,

Renault, Nissan &

other CVs

Gujarat (Sanand)HVAC Assembly, Condensor Assembly, Compressor,

Hose and Pipe Line

TAMO & Suzuki

Motor Gujarat

Gujarat- Karsanpura

(Greenfield Plant)

HVAC Assembly, Injection Molding,

Evaporator & Heater

Suzuki Motor

Gujarat

In the last six years, Subros has generated accumulated strong operating Cashflows of ~9bn, while incurring capex close to ₹7.8 bn. The company has incurred major capex in the last couple of years to start the operation of its Greenfield Karsanpura plant (capex of ₹110 cr for both the phases) and will incur just 60-70 cr of capex in FY 20E as maintenance capex. In FY 21E too, the capex will lie in a similar range. The Phase 1 at Karsanpura plant has started operations in May 2019 with a capacity of 750,000 and at a capex of ₹60 cr for supplying to Suzuki Motors Gujarat. The second phase will come up by FY21-22. Over the next two years, we expect ROA to increase to 7.3% from 5.3% in FY 19, margins to improve to 11% in FY 21 from 10.7% in FY 19 and ROCE to increase at ~18% despite

auto sector facing a slowdown.

ROE vs ROCE


6.7% 6.4% 7.2%

12.8%

15.4%

11.7%10.1%

13.4%9.5% 10.3%11.8%

15.6%

20.7%19.2%

14.7%

18.3%

0%

5%

10%

15%

20%

25%

FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20E FY 21E

ROE (%) ROCE (%)


LKP Research 11

Q1 FY19 results ₹. Mn Q1 FY20 Q4 FY19 % qoq Q1FY19 % yoy

Net sales 5,722 5,181 10.5% 5,317 7.6%

Raw material costs 4,086 3,624 12.8% 3,736 9.4%

Employee costs 555 489 13.6% 526 5.6%

Other expenses 530 518 2.2% 485 9.3%

EBITDA 551 550 0.3% 570 -3.3%

EBITDA margins (%) 9.6% 10.6% (100 bps) 10.7% (110 bps)

Other income 23 19 19.7% 41 -43.8%

Depreciation 215 206 4.3% 188 14.8%

Interest expenses 74 68 8.5% 140 -47.2%

PBT 285 294 -3.2% 284 0.3%

Tax 85 132 -35.8% 61 40.5%

Adj. PAT 200 162 23.5% 223 -10.6%

Adj EPS (₹) 3.06 2.48 23.5% 3.72 -17.8%

Exceptional items 218 - -

Reported PAT 418 162 158.4% 223 87.1%Source: Company, LKP Research

Quarterly Revenue breakup Q1 FY20 Quarterly Revenue breakup Q1 FY19


PV 73.4%

ECM 11.2%

Home AC 10.8%

Truck 2.4%

Bus 1.2%Reefers & Railways 0.5%

Others 0.4%

PV 79.0%

ECM 11.0%

Home AC 2.3%

Truck 2.3%

Bus 1.9%Reefers & Railways 0.8%

Others 1.3%

Outlook and valuationAlthough the auto industry is under pressure currently, we believe that PV industry will see an improvement in FY21E, if not in H2 of FY20. Good monsoons, taxation reforms by GOI, better festive, low base of H2 FY19 and BS VI demand may result in improved second half. In FY21E, new model launches, low base of FY21 and pent up demand of FY20E may lead to a much stronger year. In view of this, we expect Subros to be among the early ones to be benefitted being the market leader in auto AC business. In the Non PV business, the Zamil acquisition has resulted into an extra-ordinary strong traction in the Home AC business, while regulatory compulsion has opened the doors for the company in the CV sector. Opportunities in the form of approvals to target the metro coaches in railways are another big opportunity. By virtue of this, the company is able to reduce its dependence on auto business vertical. With superb efforts towards localization of RM, operating leverage (mainly in the Home AC business), and modification of processes will lead to margin growth. With continuous debt repayment, we expect net D/E to reach 0.12x in FY21E from 0.78x in FY 18 and 0.28x in FY19. Reduction in capex will lead to improvement in return ratios, due to which we believe that the company can command premium valuations. The stock is currently trading at 13.7x FY21E earnings. We initiate a BUY rating on the stock with a target price of ₹303, valued at FY21E PE of 17x.

Risks• Slower than expected recovery in the auto sector may dent our expectations from the auto

sector

• Slowing down of demand in Home AC segment may not lead to margin improvement.

• Increase in RM prices may hurt margins.


LKP Research 12

Profit & Loss Statement

YE Mar (₹.mn) FY 18 FY 19 FY 20E FY 21E

Total Revenues 19,129 21,245 19,740 23,909

Raw Material Cost 13,349 14,841 13,858 16,736

Employee Cost 1,881 2,065 1,875 2,224

Other Exp 1,798 2,059 1,935 2,319

EBITDA 2,100 2,281 2,073 2,630

EBITDA Margin(%) 11.0% 10.7% 10.5% 11.0%

Other Income 74 102 120 140

Depreciation 920 788 807 856

EBIT 1,180 1,492 1,266 1,774

EBIT Margin(%) 6.2% 7.0% 6.4% 7.4%

Interest 412 422 355 359

PBT 842 1,173 1,030 1,555

PBT Margin(%) 4.4% 5.5% 5.2% 6.5%

Tax 218 378 258 389

Adjusted PAT 624 795 773 1,166

APAT Margins (%) 3.3% 3.7% 3.9% 4.9%

Exceptional items -18 -33 218 0

PAT 606 761 991 1,166

PAT Margins (%) 3.2% 3.6% 5.0% 4.9%

Balance Sheet

YE Mar (₹. mn) FY 18 FY 19 FY 20E FY 21E

Equity and Liabilities

Equity Share Capital 120 130 130 130

Reserves & Surplus 3,928 6,671 7,554 8,594

Total Networth 4,048 6,801 7,685 8,725

Total debt 1,526 574 354 304

Net Deferred Tax -114 13 13 13

Long term provisions 233 401 551 671

Current Liab & Prov

Trade payables 4,099 3,899 3,840 4,585

Short term provisions+ borrowings 1,878 1,663 1,363 1,063

Other current liabilities 1,540 1,051 1,051 1,051

Total current liab and privs 7,517 6,613 6,254 6,699

Total Equity & Liabilities 13,210 14,402 14,857 16,412

Assets

Net block 6,697 6,900 6,593 6,337

Capital WIP 469 633 583 433

Other non current assets 1,058 1,042 1,142 1,242

Total fixed assets 8,223 8,575 8,318 8,012

Cash and Bank 198 899 1,648 2,397

Inventories 2,396 2,492 2,506 3,210

Trade receivables 1,614 1,673 1,622 2,031

Loan, Advances & others 418 450 450 450

Other current assets 360 312 312 312

Total current Assets 4,987 5,827 6,539 8,400

Total Assets 13,210 14,402 14,857 16,412

Cash Flow

YE Mar (₹ mn) FY 18 FY 19 FY 20E FY 21E

PBT 842 1,173 1,030 1,555

Depreciation 920 788 807 856

Interest 412 422 355 359

Chng in working capital 1,075 (990) 370 (1,021)

Tax paid (140) (242) (258) (389)

Other operating activities 0 0 0 0

Cash flow from operations (a) 3,155 1,000 2,566 1,554

Capital expenditure (2,312) (1,269) (450) (450)

Chng in investments 0 0 0 0

Other investing activities 5 12 0 0

Cash flow from investing (b) (2,306) (1,258) (450) (450)

Free cash flow (a+b)

Inc/dec in borrowings (206) (1,441) (70) 130

Dividend paid (incl. tax) (36) (80) (107) (126)

Interest paid (477) (400) (355) (359)

Cash flow from financing (c) (719) 173 (533) (355)

Net chng in cash (a+b+c) 130 (84) 1,583 749

Closing cash & cash equivalents 150 65 1,648 2,397

Key Ratios

YE Mar FY 18 FY 19 FY 20E FY 21E

Per Share Data (₹)

Adj. EPS 9.5 12.1 11.8 17.8

CEPS 23.6 24.2 24.1 30.9

BVPS 61.8 103.8 117.3 133.2

DPS 0.5 1.2 1.6 1.9

Growth Ratios(%)

Total revenues 24.6% 11.1% -7.1% 21.1%

EBITDA 25.2% 8.6% -9.1% 26.9%

Adj. PAT 40.7% 27.3% -2.7% 50.9%

Adj. EPS Growth 28.9% 27.3% -2.7% 50.9%

Valuation Ratios (X)

PE 25.3 19.9 20.4 13.5

P/CEPS 0.2 0.2 0.2 0.1

P/BV 3.9 2.3 2.1 1.8

EV/Sales 3.2 2.8 2.9 2.4

EV/EBITDA 29.0 25.8 27.8 21.5

Operating Ratios (Days)

Inventory days 65.5 61.3 66.0 70.0

Recievable Days 29.9 28.7 30.0 31.0

Payables day 76.0 67.0 71.0 70.0

Net Debt/Equity (x) 0.78 0.28 0.18 0.12

Profitability Ratios (%)

ROCE 20.7% 19.2% 14.7% 18.3%

ROE 15.4% 11.7% 10.1% 13.4%

Dividend payout 0.2% 0.5% 0.7% 0.8% Source: Company, LKP Research


LKP Securities Ltd, 13th Floor, Raheja Center, Free Press Road, Nariman Point, Mumbai-400 021. Tel -91-22 - 66351234. Email: [email protected], web: www.lkpsec.com

DISCLAIMERS AND DISCLOSURES

LKP Sec. ltd. (CIN-L67120MH1994PLC080039, www. Lkpsec.com) and its affiliates are a full-fledged, brokerage and financing group. LKP was established in 1992 and is one of India's leading brokerage and distribution house. LKP is a corporate trading member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited(NSE), MCX Stock Exchange Limited (MCX-SX).LKP along with its subsidiaries offers the most comprehensive avenues for investments and is engaged in the businesses including stock broking (Institutional and retail), merchant banking, commodity broking, depository participant, insurance broking and services rendered in connection with distribution of primary market issues and financial products like mutual funds etc.

LKP hereby declares that it has not defaulted with any stock exchange nor its activities were suspended by any stock exchange with whom it is registered in last five years. However, SEBI and Stock Exchanges have conducted the routine inspection and based on their observations have issued advice letters or levied minor penalty on LKP for certain operational deviations in ordinary/routine course of business. LKP has not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has its certificate of registration been cancelled by SEBI at any point of time.

LKP offers research services to clients. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

Other disclosures by LKP and its Research Analyst under SEBI (Research Analyst) Regulations, 2014 with reference to the subject company(s) covered in this report-:

Research Analyst or his/her relative’s financial interest in the subject company. (NO)

LKP or its associates may have financial interest in the subject company.

LKP or its associates and Research Analyst or his/her relative’s does not have any material conflict of interest in the subject company. The research Analyst or research entity (LKP) has not been engaged in market making activity for the subject company.

LKP or its associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report.

Research Analyst or his/her relatives have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report: (NO)

LKP or its associates may have received any compensation including for investment banking or merchant banking or brokerage services from the subject company in the past 12 months.

LKP or its associates may have received compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months.

LKP or its associates may have received any compensation or other benefits from the Subject Company or third party in connection with the research report.

Subject Company may have been client of LKP or its associates during twelve months preceding the date of distribution of the research report and LKP may have co-managed public offering of securities for the subject company in the past twelve months.

Research Analyst has served as officer, director or employee of the subject company: (NO)

LKP and/or its affiliates may seek investment banking or other business from the company or companies that are the subject of this material. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that may be inconsistent with the recommendations expressed herein.

In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest including but not limited to those stated herein. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject LKP or its group companies to any registration or licensing requirement within such jurisdiction. Specifically, this document does not constitute an offer to or solicitation to any U.S. person for the purchase or sale of any financial instrument or as an official confirmation of any transaction to any U.S. person.

Unless otherwise stated, this message should not be construed as official confirmation of any transaction. No part of this document may be distributed in Canada or used by private customers in United Kingdom.

All trademarks, service marks and logos used in this report are trademarks or registered trademarks of LKP or its Group Companies. The information contained herein is not intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading, dissemination, distribution or copying of this communication is prohibited unless otherwise expressly authorized. Please ensure that you have read “Risk Disclosure Document for Capital Market and Derivatives Segments” as prescribed by Securities and Exchange Board of India before investing in Indian Securities Market. In so far as this report includes current or historic information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.

All material presented in this report, unless specifically indicated otherwise, is under copyright to LKP. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of LKP.

Best proxy to PV and CV recovery - i.marketsmojo.com

Documents

Transcript of Best proxy to PV and CV recovery - i.marketsmojo.com