Buy Suprajit Engineering Ltd For Target Rs.440 - Emkay Global Financial Services
Suprajit Engineering Limited's (SEL) Q1 performance was a miss with margins declining by ~200bps QoQ to 10.5% (our est. 12.7%). We believe i) cyclical recovery in the underlying industries, ii) market-share gains owing to competitive pricing/scale and industry consolidation, iii) growth in content per vehicle (led by new products) and iv) healthy order wins would drive ~11% revenue CAGR in FY23-25E. We introduce FY26E and cut FY24E EPS by 11.6% mainly to reflect weak Q1 margin performance, with FY25E EPS trimmed by 2.5%. We retain our BUY rating on the stock with a revised TP of Rs440, based on 20x its FY25E EPS. Key downside risks: Lower-than-expected growth in underlying auto segments, slower acceptance of new products and adverse movement in currency/commodity prices.
Miss across line items
SEL’s revenue grew by 5% YoY to Rs6.8bn vs. ~3% increase in the domestic auto industry’s growth and flat global auto industry’s performance (~7% miss). Among divisions, revenue for Suprajit Controls (SCD; auto and non-auto exports from India and businesses outside India) increased by ~8% YoY, while the Domestic Cable Division’s (DCD; comprises cables and some new products in India) revenue was flat due to seasonally weak aftermarket sales, with Phoenix Lamps (PLD) reporting ~5% growth. Suprajit Electronics (SED) registered revenue of ~Rs279mn. EBITDA margin declined by ~200bps QoQ to 10.5% (our est. 12.7%) amid ~160bps gross margin contraction. SCD/DCD/PLD reported 7.2%/17.6%/8% margins (vs. 4.6%/15.4%/5.5% in Q1FY23). Reported PAT stood at Rs331mn (our est.: Rs518mn; Consensus est.: Rs495mn)
Earnings call KTAs
i) Mgmt. has retained its positive outlook for the rest of the year and beyond, except for macro-related weakness in overseas non-autos (recovery expected from next year); expects to outperform the Indian auto industry by 5-10%; ii) Overall, SEL is moving up the CPV chain, with the addition of new products (e.g., ASPs of all new products are over 10x higher than for typical cables); iii) SCD to report double-digit revenue growth this year accompanied by double-digit margins from Q3; peak annual revenue run rate from auto/non-auto order wins stands at ~USD26mn/~USD8mn (SOP from 1-3 years/1-2 years, respectively); iv) SED – peak revenue run rate from order wins of Rs1.5bn (SOP in1-2 years); business has been secured at decent margins and the ambition is to reach double-digit levels here as well; v) Consolidation of the European lamps business is expected to be completed by year-end; management expects current 8-8.5% PLD margins to move to double-digit levels in a couple of quarters; ‘Last Man Standing strategy’ is continuing to play out amid challenges being faced by global competition; vi) 12-14% margin guidance retained for FY24; weakness in non-auto is likely to be mitigated by automotive and electronics ramp-up; vii) FY24 capex spend at Rs14bn.
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