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Suprajit Engineering Limited's (SEL) Q3 margin performance was strong (rose 220bps QoQ to 12.1%), with PAT largely in-line with our estimates. While the global-facing business (particularly non-autos) may remain weak in the near term, we believe that: i) market-share gains owing to competitive pricing/scale and industry consolidation, ii) growth in content per vehicle (led by new products), iii) healthy order wins, and iv) cyclical recovery in domestic 2Ws, would drive ~12% revenue CAGR over FY24E-26E. We have cut FY24E/FY25E/FY26E EPS by ~5%/~8%/~8% on soft non-auto exports outlook for next few quarters and higher interest expenses. Retain ADD with revised TP of Rs420 at 18x FY26E EPS. Key risks: Lower-than-expected growth in underlying segments and adverse movement in currency/commodity prices.

Strong margin performance in Q3

Revenue grew ~5% YoY to ~Rs7.2bn (in-line); Domestic Cables Division (DCD) revenues grew 8% YoY; Suprajit Controls Division (SCD) revenues declined 4.6%. EBITDA margins improved ~220bps QoQ to 12.1% (Emkay est.:10.6%; Consensus est.:10.7%) on account of gross margin expansion and reduction in employee cost. SCD/DCD margins improved by ~280bps/~180bps QoQ; Phoenix Lamps Division (PLD) margins sustained QoQ at 12.4%, while Suprajit Electronics Division (SED) margins stood at 11.1% vs. 5.1% in Q2. Reported PAT grew ~6% YoY to Rs402mn. Company declared an interim dividend of Rs.1.1/sh for FY24. Debt stands at Rs6.2bn.

Earnings call KTAs

1) Company expects Q4 to be a decent quarter overall, with comfortable double-digit growth next year; Indian automotive market is showing signs of growth; hopeful that weakness in non-automotive category in North America would bottom out soon; 2) In SCD (currently operating at ~50% utilization), the company has won new orders in auto and non-auto; comfortable double-digit revenue growth is seen in automotive category for FY25E and FY26E. It expects to gain from global vendor consolidation in this division; SCD margins to reach double-digits in 3-4 quarters, driven by better pricing in new wins, operating leverage and shifting of low-margin businesses outside India to within India; 3) DCD to be helped by improvement seen in 2Ws and aftermarket segment, which have been tepid till Q3; 4) PLD continues to grow with consistent double-digit margins; Trifa brand has now been acquired by SEL with liquidation expected in couple of quarters; 5) SED has ramped-up deliveries of actuators, digital clusters, and throttle position controls to ICE and EV 2/3W clients – with new wins progressing well; it has crossed Rs100mn/mth revenue run rate, which will continue for few more quarters; 6) The Red Sea issue has led to 7-9x spike in container costs, and would affect Q4 margins, but growth and other initiatives are seen offsetting some of the impact; 7) SEL has acquired land recently and is looking for more land parcels to cater to growth requirements.

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