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Healthy margin performance; Further recovery ahead

Suprajit Engineering (SEL) reported consolidated EBITDA margin of 11.7% (+40bps YoY, +70bps QoQ), broadly in-line with JMFe led by pass-through of inflationary costs to customers. Restructuring at LDC and PLD has started yeilding results with the former with the former turning EBITDA positive and the later reporting double-digit EBITDA margin in 3Q. Benefit of softening inflationary pressure and cost control initiatives are expected to further drive margins going ahead. Long-term profitability would be driven by a) new business on vendor consolidation by global OEMs, b) new product development and ramp-up of STC division, c) exposure to the replacement market and d) recovery in 2W sales. Demand from non-automotive segment is expected to remain muted in 4Q. While easing supply constraints is likely to drive the growth for automotive segment, recessionary trend in US and EU may affect global automotive market. Overall order book remains healthy. LDC acquisition has been strategic and we expect it to be EPS accretive from FY24. Order wins for newer products is expected to drive STC division going ahead. We expect EPS CAGR of 23% over FY22-25E. We maintain BUY with Mar’24 TP of INR 440 (1-yr fwrd PE of 20x). Technological obsolescence of halogen bulbs in the long term and inability to deliver healthy performance in subsidiaries are the key risks.

* 3QFY23 – Margin in-line: SEL reported consol. net sales stood of INR 6.9bn (+44% YoY, -3% QoQ), 8% below JMFe. EBIDTA margin stood at 11.7% (+40bps YoY, +70bps QoQ), broadly in-line with JMFe. Sequential improvement was led by 1) pass-through of inflationary costs to customers and 2) softening inflationary pressure. EBITDA stood at INR 809mn (+50% YoY, +3% QoQ). Adj. PAT came-in at INR 380mn (+20% YoY, -17% QoQ). Gross debt increased by INR c.368mn QoQ to INR 6.04bn.

* Automotive cables division: Automotive cable division revenue stood at INR 3.2bn (+11% YoY, -4% QoQ), 9% below JMFe. Performance at SAL and SEU (cables export businesses) were impacted by slowdown in EU. However, orderbook remains healthy. Domestic cables division (both OE and aftermarket) performed well despite muted 2W industry growth. Margin came in at 17.5% (+130bps YoY, +60bps QoQ), in-line with JMFe driven by pass-through of cost inflation to customer and lower freight cost. Overall, the company expects healthy traction going ahead led by new order wins and strong aftermarket demand. New facility for aftermarket cables is expected to commence in 4Q

* Phoenix Lamps division (PLD): : Revenue stood at INR 966mn (-5% YoY, +6% QoQ), in-line with JMFe. Margin came in at 10.9% (+560bps YoY, +340bps QoQ), 290bps above JMFe. Sequential improvement was led by pass-through of inflationary costs to customers with a lag and better operational efficiencies. Restructuring at PLD has started yielding results and the company expects further improvement in operational efficiencies to drive the margin going ahead. Management reiterated that the company intends to be the last man standing for PLD and expects aftermarket segment to drive growth going ahead.

* Non-automotive cable division (including Wescon): Revenue for 3Q stood at INR 998mn (- 2% YoY, -21% QoQ). Margin came at 9% (-40bps YoY, -510bps QoQ), 550bps below JMFe. The company indicated that performance for 3Q was supported by new order execution and expects muted demand to continue in 4Q owing to slowdown in NA.

* Light Duty Cable (LDC): : Revenue stood at INR 1.8bn (+6% QoQ) while EBITDAM stood at 3.7% (vs. -1% QoQ). The company expects to achieve LDC revenue guidance of USD 100mn in FY24 led by new order wins. Demand remained soft in China, EU and NA owing to Covid and inflationary challenges. However, healthy new order wins is expected to drive the growth going ahead. SEL expects LDC to reach double-digit margin in FY24 led by price negotiation with customers, cost control initiatives and benefits of synergies post integration.

* Suprajit Technology Centre (STC): SEL is ramping up the production for digital clusters, throttle position sensors, rotary sensors and lock actuators both in the ICE and EV space. Order book for these products remains healthy. These and some of new products will aid the company’s content per unit in 2Ws over the medium-to-longer term.

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