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SCS acquisition to further accelerate growth

Suprajit Engineering (SEL)’s agreement for acquisition of prominent light duty cable maker Stahlschmidt Cable Systems (SCS; refer to press release) out of the German insolvency proceedings is another step in its ‘last man standing’ approach. It 1) potentially adds ~15% to consol. sales at attractive valuations (~0.3x EV/sales on trailing basis), 2) builds near-shoring capability for Europe along with exports from China, 3) increases wallet share with existing clients while adding new clients, and 4) enables improved competitive positioning (would emerge as the leader in Europe) with associated improvement in pricing and payment terms. We raise FY26E EPS by ~13% (driven by consolidation of SCS) with a similar increase in TP to Rs610/sh at unchanged 22x FY26E PER and retain BUY, amid improving growth outlook, esp. in the overseas business.

Conference call KTAs

1) SCS is a 100-year old organization with a marquee clientele (BMW, Audi, Daimler, and leading tier-1s). SEL had been interested in acquiring SCS for several years now; the company has strong product and manufacturing capabilities, but had run into cash problems due to frequent shifting of plant locations to lower-cost countries within and outside Europe in order to maintain price-competitiveness. 2) The acquisition enables SEL to now add near-shore capabilities in Europe (via SCS’s Morocco plant) to its existing on-shore (Hungary) and far-shore (India/China) solutions – akin to its full-range capabilities for US customers; the Moroccan plant is located near the Tangier port, in close proximity to both, Europe (2 hours) and the US (6-8 hours), in a reduced tariff zone. 3) The transaction also includes engineering and sales teams based out of Germany, in addition to complementary solutions out of China (existing China plant supplies largely to OEMs within the country, whereas SCS’s China plant is for exports to the US via Canada). 4) The SCS acquisition would help increase wallet share with existing customers (SEL already serves 5 of SCS’s top-6 customers; the company had found it difficult to win business away from SCS earlier) and gain some new clients; it is now being able to offer stronger, comprehensive solutions at better terms with cross-selling opportunities (e.g. SCS is not present in actuators, unlike SEL); the combined organization would now emerge as the leader in Europe. 5) The acquisition has happened with support and understanding of top common customers; SEL has been able to negotiate beneficial pricing and payment terms for existing SCS contracts. 6) SCS clocked EUR50mn revenues last year (EUR35mn in Europe and Morocco, and the remaining in China and Canada); the transaction EV is placed at EUR13.5mn (with up to EUR5mn additional investments seen for aiding a turnaround); would be financed entirely via internal accruals. 7) Financial closure is to take place in 2 tranches, subject to certain precedent conditions – tranche 1 (Europe, Morocco) from Jul-24 and tranche 2 (China, Canada) a few months later. 8) Integration would take ~1 year, after which profitability is expected to improve; transaction to be EPS accretive once integration is complete.

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