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Suprajit Engineering Limited's (SEL) Q2 performance was a miss, with margins declining by 67bps QoQ to 9.8% (Emkay est. 10.8%). We believe while the global-facing business (particularly non-autos) may remain weak in the near term 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 ~10% revenue CAGR in FY23-26E. We have cut FY24E/FY25E/FY26E EPS by ~13%/~8%/~2% on weak Q2 margins and soft non-auto exports outlook for the next few quarters. We retain our BUY rating with a revised TP of Rs460 at 18x its FY26E EPS (rolled-over). Key risks: Lower-than-expected growth in underlying segments and adverse movement in currency/commodity prices.

Suprajit Engineering: Financial Snapshot (Consolidated)

Gross margin deterioration impacts sequential EBITDA

Revenue declined by 1% YoY to ~Rs7.1bn; on a segmental basis, Suprajit Controls Division (SCD; comprises automotive and non-automotive exports from India and businesses outside India) reported a ~5% decline, while Phoenix Lamps Division’s (PLD) revenue growing 8%. Consolidated EBITDA fell ~11% YoY to Rs698mn, with margins down 67bps QoQ to 9.8% (Emkay est.:10.7%) amid ~180bps gross margin deterioration. SCD reported a 374bps QoQ margin decline to 3.4%, while the domestic cables division’s (DCD) margins fell 110bps QoQ to 16.6%. PLD’s margins grew strongly by 483bps QoQ to 12.3%. Reported PAT declined by ~24% YoY to Rs348mn (below estimates), with the miss being largely on account of lower-than-expected EBITDA.

Earnings call KTAs

1) The domestic commuter 2W segment is yet to pick up, though signs of positivity are being witnessed in the festive season; the domestic business has been strong so far in Q3, providing confidence for the remaining H2; SCD prospects remain challenged for the remaining part of FY24E, though DCD and PLD are expected to do well; longer-term growth visibility remains intact, led partly by consolidation of auto component suppliers globally; 2) Management expects adverse macros and climatic conditions in the U.S. to continue imparting pressure on the non-auto business in particular (amid weakness in non-discretionary spends for lawn mowers, etc.) for the coming few quarters; European markets are still unstable, though Suprajit continues to register healthy business wins; 3) While auto exports are healthy (e.g., 4W cables), there is postponement of demand at the customer-end due to tough macros (across auto and non-auto); non-auto margins in particular are unlikely to see much improvement during H2; 4) Suprajit’s offering of the U.S./Europe front-end with back-end in India is seeing good traction; the company is looking at moving production of certain parts to India to improve profitability; 5) Suprajit Electronics Division (SED) turned EBITDA positive within the first year of operations; started supplying actuators to large E-2W customers with digital clusters also seeing increased traction; 6) FY24E capex guidance unchanged at Rs1.4bn.

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