Subros - 2QFY2013 Result Update - Angel Broking

For 2QFY2013, Subros (SUBR) reported a poor bottom-line performance led by a sharp increase in depreciation and interest expense and lower other income. On a sequential basis, the performance was impacted due to the labor strike at Maruti Suzuki (MSIL) which resulted in a volume decline of 25.9%. Going ahead, we expect the volumes to recover in 2HFY2013 led by the festival demand. Further, we expect the localization initiatives to aid margin expansion in a gradual manner. We maintain our Buy rating on the stock.

Poor bottom-line performance: SUBR posted a strong 15.8% yoy growth in net sales to Rs.279cr led by a 14.5% yoy (17.9% qoq) growth in net average realization. Net average realization improved on account of superior product-mix led by lower share of passenger vehicles (PV) in the mix. The total volumes however, registered a flat growth (down 25.9% qoq) as volumes were impacted (loss of 30,000-40,000 units) due to the strike at MSIL's Manesar plant. The EBITDA margin expanded sharply by 299bp yoy (50bp qoq) to 9.5% driven by lower other expenditure which as a percentage of sales declined 200bp yoy (100bp qoq). Raw-material and employee expense as a percentage of sales too declined by 40bp and 60bp yoy during the quarter which aided margin expansion. Hence, the operating profit grew by 69% yoy to Rs.26cr. The net profit though witnessed a decline of 14.7% yoy (flat qoq) to Rs.3cr as interest and depreciation cost witnessed a significant jump of 50.3% and 55.6% yoy, respectively. Further, lower other income (down 89.6% yoy) also impacted the bottom-line growth.

Outlook and valuation: We expect the company's volumes to improve going ahead led by festival demand and gradual easing of interest rates which are expected to drive the demand for PVs. We also expect operating margins to improve led by localization benefits. At Rs.31, the stock is trading at 6x FY2014E earnings. We maintain our Buy rating on the stock with a target price of Rs.35, valuing SUBR at 7x FY2014E earnings.

Source : Equity Bulls

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