Suprajit Engineering Ltd: Cabled for growth on a well lit road – BUY

Benign commodity prices will further boost margins. Overall we expect margins to expand 107bps during FY15-18E. This will translate into earnings CAGR of 34% during FY15-18E.

Mar 15, 2016 08:03 IST India Infoline Research Team

CMP: Rs133, 1-yr Target: Rs180, Upside: 35.8%
 
Multiple triggers for revenue growth
Suprajit Engineering, a global leader in automotive cables, is well poised to witness industry beating revenue CAGR of 29% during FY15-18E driven by growth across segments.
 
  • Two wheeler OEMs – growth from existing customers in line with industry growth of 8-10%, higher growth from HMSI as share of business increases from ~30% currently to about 50% in the next few years
  • Passenger car OEMs – only 30% market share as no major presence with Maruti Suzuki, which is set to change as inroads have been made through acquisition of cables division of Pricol, Superior experience of HMSI for two wheelers can extend to Honda cars as well
  • Exports – large potential exists, Suprajit has set up a branch in Atlanta, USA to gain traction in that market, ramp up of business from existing customers will happen driven by high quality levels of Suprajit cables
  • Replacement market – currently dominated by unorganised players, however post implementation of GST, Suprajit with quality product at competitive prices and established brand should see strong traction
  • Phoenix Lamps – Recently acquired by Suprajit, we see strong revival in its business through synergy benefits, increasing proportion of LED lights to improve topline growth as well as profitability
Strong earnings growth expected
Backed by strong revenue growth, we see benefits of operating leverage kicking in for standalone operations as well as Phoenix Lamps. Benign commodity prices will further boost margins. Overall we expect margins to expand 107bps during FY15-18E. This will translate into earnings CAGR of 34% during FY15-18E.

Premium valuations justified, Initiate with a BUY
Suprajit is extending its leadership position in the cables business and with Phoenix acquisition will have leadership position in lighting business. Along with a strong balance sheet, healthy return ratios and high earnings CAGR, we find the valuations of 13x FY18E P/E justified. Initiate coverage with a BUY recommendation with a 1-year target of Rs180.
Financial Highlights
Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E
Revenues 612 930 1,147 1,343
yoy growth (%) 12.2 52.0 23.4 17.1
OPM (%) 15.7 15.8 16.2 16.8
Reported PAT 50 84 95 121
yoy growth (%) (1.0) 67.1 13.4 27.1
EPS (Rs) 4.2 7.1 7.9 10.1
P/E (x) 31.6 18.7 16.7 13.1
EV/EBITDA (x) 18.2 13.1 9.8 8.0
Debt/Equity (x) 0.7 1.2 0.7 0.5
RoE (%) 22.6 31.0 27.7 28.3
RoCE (%) 23.7 27.3 25.4 30.4
Source: Company, India Infoline Research

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