Upgrade to BUY on Subros - Margin at multi-quarter high - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

We upgrade Subros to BUY (ADD earlier) as the EBITDA margin surprised at 11.7% (vs 9.5% in FY20), led by higher localisation levels. The management highlights that the double-digit margin range is sustainable, driven by its cost-cutting initiatives and improving production levels. We believe that the parts supplier would benefit from a revival in passenger car volumes and the company's diversification initiatives. Subros is scaling up its presence in home ACs and railways segment (under the Make in India theme). We raise our FY22/23 estimates by ~19% to factor in improving margin outlook. We value the stock at 21x (in line with its average P/E multiple) and set a revised target price of Rs 310, based on Sep-22 EPS. Key risks: slower economic recovery in India, delayed scale-up in localisation levels.

2QFY21 financials - significant margin beat: Revenue declined by 8% YoY to Rs 4.5bn (contribution from car AC segment was 82%, 13% from ECM and 5% from other segments). However, EBITDA margin at 11.7% expanded 280bps YoY, driven by higher localisation levels, favourable segmental mix and lower revenue from Home AC segment (Rs 50mn). The gross margin expanded 180bps YoY to 30.7% due to backward integration, increase in finished/semi-finished goods and product mix. Reported PAT at Rs 177mn grew 34% YoY.

Localisation levels are the key focus: The company is reducing the import content and has achieved 75% localisation levels (including Indian design content). It is further indigenising production and has introduced VAVE initiatives for various components. The benefits of these initiatives were visible in the current quarter, and the management believes that the higher-margin band (10-12%) is sustainable.

Subros to benefit from the 'Make in India' theme: The company is expanding in the home AC and railways segments. After the acquisition of Zamil in the previous year, it has a capacity of ~250k-300k units. The government has recently banned imports of ACs with refrigerants to promote domestic manufacturing. Subros has recently developed the condenser for outdoor units and is in the process of developing the complete outdoor unit and components for the indoor unit as well. The company is targeting sales of Rs 2-2.5bn (~10% of revenues) over the next 2-3 years from this segment. Similarly, for railway coaches, Subros expects a revenue of Rs 250-300mn under the Make in India theme.

Shares of SUBROS LTD. was last trading in BSE at Rs.257.1 as compared to the previous close of Rs. 240.75. The total number of shares traded during the day was 24426 in over 2161 trades.

The stock hit an intraday high of Rs. 259.8 and intraday low of 239.15. The net turnover during the day was Rs. 6187675.

Source : Equity Bulls

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