Diversifying the revenue mix
In a sluggish market environment, Subros delivered ~8% YoY revenue growth driven by the ramp up in the home AC segment (post acquisition of Zamil in 4QFY19). Reiterate BUY with a revised TP of Rs 230 (at 15x FY21 EPS, 17x earlier). We are lowering earnings by 11% / 7% over FY20/21E to factor in lower margins. We reduce our multiple due to the slowdown in the pass car industry, which accounts for over 80% of its revenues.
HIGHLIGHTS OF THE QUARTER
* Financials: Revenue at Rs 5.7bn grew 8% YoY (73%- Car AC, 11%- ECM, 11%- Home AC, 5%- CV & others). EBITDA margin contracted 110/100bps YoY/QoQ to 9.6% due to higher contribution from the low margin home AC segment. Interest cost included a charge of Rs 71mn towards enhanced compensation for Manesar land. APAT came in at Rs 143mn (-34/-12% YoY/QoQ).
* Subros gained market share in the PV-AC segment to 45% (vs 42% in FY19) as it won orders for the refreshed WagonR & Ertiga platforms and for Renault Nissan’s exports. Contribution of PV-AC to revenues declined to 73% (vs 79% in FY19).
* Home AC segment ramps up: This segment accounted for Rs 620mn (11% of revenues). The management expects this business to contribute ~Rs 1,250mn in FY20. However, EBITDA margins at 4-6% are expected to improve once the utilization levels rise (currently at 60%). The strategy to broad base the revenue mix is enabling Subros counter the slowdown in the auto segment.
* Electric vehicles: Subros is investing in R&D for AC products in electric cars/buses. Content per vehicle will increase as EVs would require higher powered battery cooling module. We believe Subros is well prepared for future technologies due to its collaboration with Denso.
Maintain BUY as
(1) Subros has gained market share in the PV segment in a slowing market (up by 3%)
(2) The co is diversifying into newer segments including home AC component supplies and expects the share of other segments to double to 40% in the medium term.
(3) With Denso as its strategic partner, the co has relevant technology for next generation products.
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