Maintain ADD on Subros - Expect market share gains to continue - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities.

Subros (Q4FY20): Expect market share gains to continue. Maintain ADD
(TP Rs 190, CMP Rs 170, MCap Rs 11bn)

We believe that while Subros will benefit from a recovery in volumes at Maruti Suzuki - its largest customer (which accounts for over 3/4th of revenues), the diversification initiatives are delayed due to the COVID outbreak (home AC segment ramp-up is pushed back, CV and other segments will witness sluggish trends). We maintain our ADD rating on the stock.

4QFY20 Financials: Revenue declined by 12/2% YoY/QoQ to Rs 4.58bn (78%- Car AC, 14%- ECM, 0%- Home AC, 8%- CV & others) which was inline with estimates. While EBITDA margins were ahead of estimates at 9.1% (-150/-130bps YoY/QoQ), it was offset by higher depreciation (+10% YoY) as the new plant at Karsanpura (Gujarat) was commissioned earlier in the year. Higher other income at Rs 86mn and lower tax rates at 27.8% (vs. 45% YoY) cushioned the PAT, which came in at 161mn, (flat YoY, +19% QoQ).

Call & other takeaways: (1) Market share gains in PVs: Subros' market share increased to 44% in FY20 (vs. 42% YoY) in the pas car AC segment. As Maruti contributes to over 3/4th of its revenue; we expect Subros to benefit from market share gains in FY21E (due to higher demand for entry cars). (2) Collaboration with Denso: Subros continues to gain access to new product technology from the Japanese partner including the compressors for the new Wagon R as well as products for EVs. Subros is present across most models of Maruti including the Baleno, Ertiga, Wagon R and Swift amongst others (3) Limited dependence on China: The total import content is ~25% of sales, of which China contributes merely 3-4%. The import content in the Home AC segment is higher at ~47% though. (4) Home AC segment: The segment contributed to 5% of revenues (as production during 2H was negligible as the co was shifting assets acquired from Zamil and the downturn). The management is targeting revenues of Rs 3bn from this segment in the next few years. (5) Other highlights: Capacity utilization is currently at 30-40% levels, but is expected to firm up from hereon. Major capex is now behind, maintenance capex of Rs 600-650mn in FY21 is expected.

Maintain ADD: We are raising our FY21/22 earnings by ~12/7% to factor in lower tax rates of 25% (vs. 32% in FY20). We continue to value the stock at 17x P/E and set a FY22 TP of Rs 190. Key Risks: Aggressive market share gains by Maruti on the upside, a weaker than expected macro environment on the downside.

Shares of SUBROS LTD. was last trading in BSE at Rs.172.3 as compared to the previous close of Rs. 170.35. The total number of shares traded during the day was 4768 in over 356 trades.

The stock hit an intraday high of Rs. 175.2 and intraday low of 170. The net turnover during the day was Rs. 823937.

Source : Equity Bulls

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