Suprajit Engineering: Poised to grow on a well lit road

A focused approach with a strategic intent and an eye for detailed execution is the key to success, at Suprajit all these three aspects have been demonstrated time and again. The Company has ensured a strong foothold in the automotive control cable industry due to its relentless focus on quality and cost efficacy. Despite operating in a low cost and high volume market, Suprajit has sustained an EBIDTA margin of 14-16% over the past eight years. The Company backed by robust sales growth, consistent margins, capacity expansion drive, and wide distribution network will continue to remain the key beneficiary of booming automobile production.

Overview

Suprajit Engineering is the industry leader in design and manufacturing of a wide range of control cables for car, two/four-wheeler companies as well as non-automotive companies. The Company also manufactures a range of automobile instruments such speedometers, gear shifters, regulators and stator coils. It started its operations as a supplier to only TVS motors. Over the years, it has achieved tremendous growth and has cemented itself as the largest manufacturer of automotive cables in India with an annual capacity of over 250 million cables. The Company caters to a wide spectrum of automotive and non-automotive cables requirements through its 16 plants, two of which are 100% export oriented. It also holds the distinction of being the second largest cable manufacturer in the world and exports to some of the world’s leading manufacturers.

Undisputed Leadership in the domestic 2W Space

Suprajit is the market leader in the domestic auto cables space, with a market share of about 40% in two-wheeler segment.  It has been consistently outperforming the industry volume growth, due to a number of factors such as strategically located plants in close proximity of major customers, expanding product portfolio, robust distribution reach with 300 distributors, and tie ups with original equipment manufacturers (OEMs).

The Company’s last three year average of operating margin was 16.6% as against industry average (auto ancillary companies) of 12%. It is the preferred cable supplier to the domestic two-wheeler original equipment manufacturers such as TVS Motor, Hero motors, Bajaj Auto, and Royal Enfield Motorcycles. Going ahead, it is expected to sustain the out performance, primarily due to the growing business with Honda Motorcycle and Scooter (HMSI), India’s largest scooter maker with a 57% market share. The revival of the rural demand after two years of tepid growth due to two consecutive weak monsoons will also be a major growth driver.

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Gaining grip on the 4W OEM segment

Suprajit has been a relatively late entrant in the passenger car cables segment. It entered the segment through the inorganic route by acquiring Shah Concabs in the year 2002. Currently the company holds about 25% market share in the domestic 4W OEM segment and mainly supplies to OEMs such as Ashok Leyland, M&M and Tata Motors. In 2015, the Company acquired the speedo cable division of Pricol. This acquisition provided it the access to major 4W customers such as Hyundai and Maruti.

Suprajit has significant scope to grow in this segment as the passenger car demand is expected to remain strong driven by lower interest rates, soft fuel prices, improvement in rural demand and implementation of 7th pay commission.

Phoenix lamps acquisition- capable cable meets dazzling light!

Over the years, Suprajit has managed to diversify its customer base from two-wheeler segment to four-wheelers and non-automotive segments. The share of two-wheeler segment in its overall revenues stood at 99% in FY 2001, but it came down to 53% in FY 2015. With the aim of diversifying its operations beyond cables, Suprajit acquired (2015) 62% stake in Phoenix Lamps (PHIL), the largest automotive halogen lamp manufacturer in India with the range of over 500 different types of products.  PHIL enjoys superior market share with domestic OEMs and it has strong traction in export markets as well. PHIL has two European subsidiaries through which it has gained significant market share in Europe and other countries in South America, Africa, and Middle East. This acquisition is a strategic fit for Suprajit as it de-risks its growth model, which was so far heavily dependent on automotive cables by creating cross-selling opportunities. It would also help Suprajit in penetrating new markets and clients.

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Wescon Controls Acquisition

In September 2016, Suprajit announced the acquisition of Wescon Controls, a U.S. based leading manufacturer of control cables in outdoor power equipment (OPE) space with industry-leading profitability (~18% EBITDA margin) for INR 295 Crore. Wescon manufactures mechanical controls, cable assemblies and screw machined components and boasts a diverse and blue-chip customer base (Harley Davidson, MTD, Husqvarna, John Deere, TORO, Honda).

Wescon’s market leading position in North America in OPE space is a significant sectoral de-risk for Suprajit in its core business of cables, which currently contributes only 3% of its total revenues. This is expected to increase to 20% post the acquisition.

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Speeding up Capex to outpace industry growth

The Society of Indian Manufacturers (SIAM) has forecasted a 6-8% growth in passenger vehicle sales in 2016-17. The medium and heavy commercial vehicle and scooter sales are expected to grow at 12-15%. Suprajit has already created a huge base to tap the upcoming opportunity. It has expanded its capacity at a CAGR of 15% over the last 8 years. It is planning to further boost its manufacturing capacity to meet future demand. The Company had Capex outlay of nearly INR 150 crore, over the past three years, the last part of it will be completed by this financial year. The Company also had an INR 30 crore Capex outlay for Phoenix which would be completed by December. Recently, it commercialized its two new plans at Oragadam (Chennai) and Anand (Gujarat). The expansion would cater to the demand from domestic as well as export market and further fortify its dominant position in the cables business.

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Premium valuation justified

suprajit-valuation-summary

Suprajit is currently trading at (INR 194.65) a PE of 20x/16x FY17/18E diluted EPS. Experts are valuing the stock at P/E of 20x on its FY18E diluted EPS, which translates into the target price of INR 250 i.e. 28% upside from the CMP of INR 194.65.

Suprajit is extending its leadership position in the cables business. While the Phoenix acquisition will enable it to have leadership position in lighting business, the Wescon acquisition is expected to boost its non-auto cable business significantly (currently contributing only 3% of its total revenues). The Astute Investor finds the valuations of 20x FY18E P/E justified on the back of a rising margin profile, high earnings CAGR and revival of rural demand.

 

This article is strictly meant for educational purpose and it may be of interest to researchers as well as students. The Astute Investor acknowledges the fact that a couple of estimates/figures provided in this report have been sourced from various financial news websites (Reuters, Money Control, 4-traders) and research reports available in the public domain.

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