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Dominance and swelling wallet share to drive outperformance; Initiate with BUY

* Founded in 1985, Suprajit Engineering (Suprajit) is among the top-three global manufacturers of control cables and halogen bulbs. Suprajit has a diversified revenue base across segments (Auto Cable: 59%; Non-Auto Cable: 23%; Lamps: 19%) and geographies (India/Overseas: 47%/53%).

* We forecast revenue CAGR of 25% over FY22-25E, driven by: 1) cyclical recovery in the underlying industry (8% medium-term volume CAGR); 2) market-share gains set to add 3pps outperformance vs. the industry, thanks to decentralized plant locations and competitive pricing owing to scale advantages; 3) growth in content per vehicle (CPV) led by new products (~Rs50,000/unit opportunity).

* We forecast 28% EPS CAGR over FY22-25E for Suprajit, encouraged by the 25% revenue CAGR and 50bps EBITDA margin expansion. RoIC is likely to improve to 20% in FY25E from 15% in FY22. We estimate average annual FCF generation of Rs2.2bn during FY24E/25E and expect the company’s balance sheet to have net-cash of Rs2.1bn by FY25E vs. net-debt of Rs1bn in FY23E (post acquisition of LDC).

* We initiate coverage with a BUY recommendation and Sep-23E TP of Rs440, based on DCF methodology which implies a 20x forward P/E. Downside risks: Slower acceptance of new products (we have modelled-in 25% revenue CAGR through to FY28E), faster EV and LED penetration, and adverse commodity/currency price movement.

Consistent outperformance of 5-10pps over industry volume growth: Suprajit’s Auto Cable segment saw 9% revenue CAGR in FY16-22 vs. flat volumes for the underlying industry driven by market-share gains of 1- 3% annually across the auto/non-auto segments. We expect Auto-Cable outperformance to endure, with 12% revenue CAGR over FY23E-28E vs. 6% volume CAGR for the underlying industry.

Resilient performer through cycles: During the past two down-cycles (FY07-09, FY19-21), Suprajit’s revenue growth was positive, thanks to: (1) the company increasing its wallet share; and (2) its diversified revenue base (healthy exposure to the aftermarket segment). The RoE, too, was healthy, at over 15%.

Auto cables (59% of revenue) to outperform, buoyed by wallet-share gains: We forecast the segment to register 29% CAGR over FY22-25E (organic revenue CAGR of 13%), led by i) upcycle in the underlying industry (8% volume CAGR); ii) increased CPV, driven by new products/premiumization; iii) market-share gains on account of competitive pricing; and iv) Kongsberg’s LDC (LDC) acquisition (~Rs5.5bn revenue accretion). CPV improvement is likely to be driven by new-product forays, such as digital speedometers, electronic throttles, actuators and allied cable products. This should more than offset the CPV reduction because of transition to electric vehicles (EVs).

Non-auto cables (23% of revenue) to see a beat, boosted by entry in new industrial segments: We forecast 24% revenue CAGR over FY22-25E (organic CAGR of 14%), led by: 1) upcycle in the overseas industrial segment – outdoor power equipment (8%); 2) market-share gains in new segments such as agriculture, construction, power sports vehicles, and medical; and 3) the LDC acquisition (Rs1.1bn revenue accretion).

Lamps segment (19% of revenue) supported by industry consolidation: We forecast the segment to post a 9% revenue CAGR over FY22-25E, aided by the upcycle in the underlying industry (7%) and a higher wallet share in the halogen lamps segment, owing to Industry consolidation. We expect market-share gains to offset the CPV loss, which was due to industry shift towards LED lamps.

Initiate coverage with BUY: We initiate coverage on Suprajit with a BUY recommendation, and Sep-23E TP of Rs440/share, based on DCF methodology which implies a 20x forward P/E. Our target multiple is broadly in line with the company’s 10-year average P/E. Suprajit is attractively valued on ROE-adjusted PEG at 0.6x and scores above the competition (average at 1.5x).

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