IGI Logo

Margin recovery ahead; LDC turnaround remains key

Suprajit Engineering (SEL) reported consolidated EBITDA margin of 11% (+260bps QoQ), c.100bps above JMFe led by pass-through of inflationary costs to customers. Management expects LDC division to turn profitable from 3Q onwards with margins improving gradually to double-digit during FY24. Further pass-through of inflationary costs and the benefit of softening commodity prices is expected to drive margin recovery going ahead. Long-term profitability would be driven by a) new business on vendor consolidation by global OEMs, b) new product development, c) exposure to the replacement market and d) recovery in 2W sales. Demand from non-automotive segment remains strong. While easing supply constraints is likely to drive the growth for automotive segment, recessionary trend in US and EU may affect global automotive market. LDC acquisition has been strategic for SEL and we believe it will be EPS accretive from FY24. Capex spends of INR 1.4bn during FY23 will be towards Electronics division where the company has started winning orders from existing and new customers. We expect EPS CAGR of 24% over FY22-25E. We maintain BUY with Sept’23 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.

* 2QFY23 – Margin beat: In 2QFY23, net sales stood at INR 7.2bn (+45% YoY, +11% QoQ), driven by consolidation of recently acquired LDC business. EBIDTA margin stood at 11% (-520bps YoY, +260bps QoQ), 100bps above JMFe. Sequential improvement was led by 1) pass-through of inflationary costs to customers during 2Q (albeit with a lag), 2) gradual improvement in profitability at LDC. EBITDA stood at INR 787mn (-2% YoY, +46% QoQ). Adj. PAT came-in at INR 457mn (-13% YoY, +68% QoQ). FY23 capex guidance stands at INR 1.4bn for India business. Net debt increased by INR c.0.3bn QoQ to INR 5.7bn due to higher working capital which is expected to normalise going ahead.

* Automotive cables division: Automotive cable division revenue stood at INR 3.3bn (+10% YoY, +16% QoQ), 10% above JMFe. The company stated that domestic cables division delivered robust performance despite muted 2W industry growth. SAL and SEU also delivered strong performance led by new launches and the order pipleline remains healthy. Margin came in at 16.9% (-300bps YoY, +40bps QoQ), 20bps above JMFe driven by pass-through of RM cost inflation to customers. The company expects good traction in cable division driven by new product wins, strong OEM demand and aftermarket growth. New facility at Bommasandra is expected to complete by 4Q.

* Phoenix Lamps division (PLD): Revenue stood at INR 910mn (-2% YoY, +9% QoQ), 4% above JMFe. Margin came in at 7.5% (-210bps YoY, +200bps QoQ), 150bps above JMFe. Sequential improvement was led by pass-through of inflationary costs to customers with a lag and better operational efficiencies. The company indicated of further improvement in margins over next 1-2 years led by softening RM costs and better operational efficiencies.

* Non-automotive cable division (including Wescon): Revenue for 2Q stood at INR 1.3bn (+25% YoY, +8% QoQ), 2% below JMFe. Margin came at 14.1% (+270bps YoY, +360bps QoQ) due to pass-through of RM cost to customers during the quarter. Outlook remains positive and despite moderation in underlying demand in US, company has guided for a double-digit revenue growth on the back of healthy order book

* Light Duty Cable (LDC): Revenue stood at INR 1.69bn (+6% QoQ) while EBITDAM stood at -1% (vs. -5% QoQ). The company has revised LDC revenue guidance downward by 5- 7% from USD95mn owing to currency depreciation, slowdown in Europe and zero-covid policy in China impacting growth. The company indicated that while price increase from customers has been slower than expected, it expects EBITDA to turn positive in 3Q, with gradual improvement in subsequent quarters. SEL expects LDC to reach double-digit margin in FY24 led by benefits of synergies post integration.

* Suprajit Technology Centre (STC): SEL has commenced production for digital clusters, throttle position sensors, rotary sensors and lock actuators for which new orders have been received from various customers (5 customers now), particularly in the 2W and EV space. These new products will help company to enhance its content per unit in 2Ws.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361

Above views are of the author and not of the website kindly read disclaimer