Buy Subros Ltd For Target Rs.367 - HDFC Securities
Subros is the largest player in Indian passenger vehicle AC segment with a ~45% market share. Subros derives ~3/4th of its revenues from Maruti Suzuki which has given a steady performance despite Covid pandemic as it has a wide portfolio of small vehicles. Besides the company is also scaling up its non-PV segment business which have strong potential of growth. Its contribution from Non-PV segment stood at 18% as on Q2FY21. In this segment its offers home and automotive air-conditioning systems for verticals like Commercial vehicles (CVs), Engine Cooling Modules (ECMs), buses, trains and home ACs. Increasing preference of AC buses, modernisation of railways with higher number of AC coaches and higher transport of goods through roads (AC truck cabins) could enhance the demand for Subros’ products. Increased local content in manufacturing has led to significant cost reduction and margin expansion. Technical collaboration with Denso has helped the company in R&D and developing new products. The recent banning of imports of ACs by the Government would give a further boost to domestic manufacturing and benefit Subros.
Valuations and Recommendations:
We expect revenues of the company to grow at 3.8% CAGR FY20-FY23. EBITDA is expected to grow at 9.4% CAGR driven by savings on higher localisation and EBITDA margins are expected to expand ~150bps. PAT is expected to grow by 26% CAGR on back of lower tax rates. Investors can buy the stock in the price band of Rs 304-306 band (25x FY22E EPS) and add more on declines to Rs 280-282 band (23x FY22E EPS) for a base case fair value of Rs 330 (27x FY22E EPS) and bull case fair value is Rs 367 (30x FY22E EPS) in the next two quarters.
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