Operations are back at 75% of pre-COVID level
While Subros reported a weak 1QFY21 (a loss of Rs 240mn), the outlook is encouraging as the company is currently operating at 75% of pre-COVID levels and production schedules from OEMs are increasing MoM. The company continues to benefit from new technology provided by Denso (vane rotary compressors and EV-based compressors). We reiterate our ADD rating on the stock – Subros remains a proxy to improving car production (at Maruti) – and we recommend investing in it on every correction (post the sharp rally from COVID level lows).
* 1QFY21 financials: Revenue declined by 87/84% YoY/QoQ to Rs 738mn (79% - car AC, 21% - others) due to an over 85% decline in car production. Subros reported an EBITDA loss of Rs 299mn due to the impact of negative operating leverage. Depreciation was lower by 10% YoY at Rs 193mn owing to single-shift working during the quarter. PBT loss was at Rs 529mn. However, the company recognised a deferred tax credit of Rs 289mn for previous losses, and hence the reported loss came in at Rs 240mn.
* Call and other takeaways: (1) Demand is at 75% of pre-COVID level and is rising further: The management highlighted that the situation is improving QoQ and is currently at 70-75% of pre-COVID levels. The management is enthused by the production schedule of its customers and expects demand to further improve in Aug/Sep-20. Subros has sustained its market share at 44% in the pass car AC segment. (2) Collaboration with Denso: Subros continues to gain access to new product technology from the Japanese partner, including the vain rotary compressors (which are lighter and have fewer components) supplied on the new Wagon R as well as products for EVs. These compressors will replace the traditional ones over the medium term. (3) Home AC: Subros is manufacturing the outdoor units and plans to produce the internal units as well, post the recent ban on Chinese imports. (4) Capex to reduce: The major Capex spends are now over. The company will incur a Capex of Rs 500-600mn/year for FY21 (vs. normalised run rate of ~Rs 1.2bn). (5) Imports: The total import content is 26-28% of sales, of which China contributes to a nominal 5%.
* Maintain ADD: While we are lowering our estimates for FY21, we are leaving them unchanged for FY22 due to the improving outlook. We now value the stock at 19x (vs 17x earlier) to factor in the above. Our revised target price is Rs 220, based on Jun-22 EPS. Key risks: Aggressive market share gains by Maruti on the upside, a weaker-than-expected macro environment on the downside.
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