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Q2 EBITDA above estimates; Increased wallet share to drive outperformance ahead

Suprajit Engineering’s Q2FY23 revenue increased by 45% (3-yr CAGR at 22%) to Rs7.2bn, slightly above our estimates, due to higher revenue in non-auto cable and LDC segments. EBITDA declined by 2% YoY (3-yr CAGR at 12%) to Rs787mn, 7% above our estimate due to higher profitability across segments. Management expects further margin expansion on price increases, commodity deflation, and turnaround in LDC. Going forward, we expect FY23E revenue growth to be robust at 53%. The uptrend is likely to endure with FY23-25E revenue CAGR at 12%, led by healthy growth in underlying segments and better wallet share. EBITDA margin is likely to contract from 14.1% in FY22 to 11.1% in FY23, owing to LDC’s acquisition, and then recover to 14.8% in FY25E, driven by better scale, improved net pricing, and expansion of LDC’s margins. We maintain a constructive view, driven by: 1) cyclical recovery in the underlying industry; 2) market-share gains vs. the industry, thanks to decentralized plant locations and competitive pricing owing to scale advantages; and 3) growth in content per vehicle (CPV), led by new products (~Rs50,000/unit opportunity). We reaffirm our BUY rating on the stock with a TP of Rs450 (Rs440 earlier), based on 20x Dec-24E EPS (Sep-24E earlier). Key risks: Slower acceptance of new products and adverse movement in currency/commodity prices.

Q2 EBITDA above estimates: Revenue grew by 45% YoY (3-yr CAGR at 22%) to Rs7.2bn (est.: Rs7bn), driven by 10% growth in auto cables, 25% growth in non-auto cables, and addition of LDC revenue (Rs1.7bn). In comparison, lamps revenue declined by 2%. EBITDA declined by 2% (3-yr CAGR at 12%) to Rs787mn (est.: Rs738mn), above our estimate due to better profitability across segments. Sequentially, EBITDA margin expanded by 260bps to 11%, owing to 40bps expansion in auto cables, 360bps improvement in non-auto cables, 200bps increase in lamps, and 360bps rise in LDC. Other income grew by 117% to Rs217mn. Overall, adjusted PAT declined by 15% (3-yr CAGR at +1%) to Rs457mn (est.: Rs387mn), above estimates led by higher operating profit and other income. What we liked: 1) Strong revenue owing to growth in the underlying industry and increased wallet share, and 2) Improvement in margin performance across segments. What we did not like: The lamps segment remains an underperformer, reporting a revenue decline of 2%.

Earnings Call KTAs: 1) New products are being developed, supported by the new R&D unit that started operations in Aug-22. Most of these products are being imported by OEMs in India. 2) Domestic cable division: Demand remains healthy across OEM and aftermarket segments. Margins have improved due to price hikes and focus on operational efficiencies. 3) Export cable division: Order book is large and growing. Most of the price increases have been implemented. 4) Non-Auto: Strong growth was witnessed during the quarter. Some softness in the outdoor power equipment segment’s demand is being felt due to slowdown in the US economy. EBITDA margin remains elevated. 5) Lamps: Revenue growth in H1FY23 remains healthy. Margin improvement is expected to continue ahead. 6) LDC: Guidance retained for EBITDA margin to turn positive in H2FY23 and return to double digits in FY24. Margin improvement would be supported by price increases, vendor consolidation, and increased sourcing from India. FY23 revenue target of $95mn has been revised lower by 5-7%, largely due to currency depreciation.

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