Subros - Medium-term drivers in place - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

Similar to the trend witnessed across auto companies, Subros' Q1FY22 margin, at 5.6% (vs. 9.7% QoQ), was lower due to negative operating leverage and impact of the partial COVID lockdown. The company is focusing on increasing localisation levels (import levels to reduce by 5% of sales in the medium term). Further, Subros will benefit from the commencement of the Maruti-Toyota joint production models from FY23E onwards. We maintain BUY with a target price of INR 410, at 22x Jun-23E EPS.

Q1FY22 financials: Revenue declined 27% QoQ to INR 4.8bn as vehicle production was impacted by COVID-led state-wise lockdowns. The non-car segment contributed 11% to the mix. EBITDA margin, at 5.6% (-410 bps QoQ), was impacted by the negative operating leverage. Other income came in at INR 48mn vs 21mn QoQ. Reported PAT, at INR 31mn (vs 256mn QoQ), was below our estimates.

Key takeaways: (1) Revenue contribution to increase from non-car segments: The non-car segment contributed 11% to the revenue in Q1FY22, of which 6% is from home ACs. Home AC revenue was INR 880mn in FY21 with the management targeting for INR 1-1.3bn in FY22. However, commodity cost pressures will impact profitability in the near term. The ECM segment accounted for 14% of revenues. (2) Maruti-Toyota tie-up: The SOP for the joint production models will commence in FY23E. Subros' has secured business for two major components for the upcoming Maruti-Toyota platform. (3) Cost pressures: The company highlighted that although the situation on the ground is improving, the industry is facing continuous challenges with semiconductor shortages. To deal with cost inflation, Subros' has a pass-through clause with customers with a one-quarter lag. (4) Import substitution: Currently, imports account for 20% of Subros' revenue; however, the management is targeting to reduce the foreign content by 5% in the next three years. This will lead to an improvement in margins, given Subros' efforts towards localisation and backward integration.

Shares of Subros Ltd., was last trading in BSE at Rs. 335 as compared to the previous close of Rs. 323.45. The total number of shares traded during the day was 4321 in over 459 trades.

The stock hit an intraday high of Rs. 335 and intraday low of 319.9. The net turnover during the day was Rs. 1414328.

Source : Equity Bulls

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