Dear Friends,
We are recommending Buy on our Actionable ViewPoints "Suprajit Engineering" as per following:-
CMP: Rs 219 Target: Rs 251 (15% Upside)
Key Points:
Suprajit Engineering Limited: Viewpoint - On a Strong Footing
· Improved traction across business segments to boost topline; company set to outpace industry: Suprajit Engineering Limited (SEL)'s all the three segments - (cables, lamps and non auto) are well poised to outpace industry. In the cables business, SEL is expecting substantial client wins in the domestic PV (Passenger Vehicle) space. Plant audits by the OEM''s are in process, and the management is expecting orders wins. Of these one of the MNC PV OEM's is in the process to tie up with SEL as a sole supplier, thus pointing at sizeable incremental revenues. The cable exports too are witnessing improved traction in both the Europe and US geographies. SEL is eyeing market share gains and new client wins in these markets and is targeting to double the export revenues to Rs 300 crores in the next three years. In order to support the incremental demand, SEL is in the midst of setting up new facilities which would take the cable capacity to 300 mn units from 250 mn units now. The Lamps business too is experiencing improved demand, especially for its H7 series of halogen bulbs. SEL's efforts in the past to improve the quality of its products is yielding results. Most of the clients parted earlier are now gradually returning back and the same is visible in improving utilization levels of the lamps division, which are nearing 60% levels (~ 30% in the recent past). The non auto business is also coming out of woods and is likely to gain traction. SEL has set up specialized business development team with a clear objective to revive the ailing topline. Green shoots are apparent in higher enquiry levels, which are likely to translate in to confirmed orders in the near term. Also 2H being a seasonally strong period for the non auto business, a major chunk of the revenues are likely to accrue in this period. We expect SEL's consolidated revenues to grow at a 17% CAGR over the next two years, which is higher than the industry growth of ~ 10-12%.
· Price hikes, softening raw material prices and operating leverage to lead to margin improvement: SEL's Q2FY2019 operating margins declined steeply by 300 BPS YoY to historic lows of 13.6%. The margin contraction is attributable to rise in raw material costs, especially that of copper and a time lag to pass on the same. Since then in October 2018 copper prices have cooled off, declining by around 5% as compared to 1HFY2019 levels. Further crude prices too have softened in the recent past, thus easing cost pressures. SEL is also likely to reap the benefits of operating leverage given the strong double digit topline growth. Secondly, SEL is taking prices hikes (though in a phased manner) to pass on the elevated raw material costs in 1HFY2019. As per management full benefit of the prices hikes would be reflected in 2HFY2019 margins, which are expected to improve to 15.5% as against 14.5% in 1HFY2019.
· Outlook - Well poised to outpace industry: SEL is on a strong footing to report a sturdy growth going ahead. Healthy demand traction across all business verticals, new customer additions coupled with new capacities going on stream would enable SEL to report a marked improvement in topline and a report a doubledigit revenue growth (17 % CAGR) over the next two years, thus beating the industry growth of 10-12%. The effect of strong revenue growth, favorable commodity costs is likely to trickle down to the bottomline as well with the earnings likely to grow at 13% CAGR over the next 2 years.
· Valuation Re initiate viewpoint coverage with a Positive view: We had re-initiated a viewpoint note on SEL dated 2nd January 2018 at a CMP of Rs 325 and subsequently had booked out our call in report dated 16th August 2018 (CMP: 247) citing headwinds for lamps and non auto business (around 40% of sales). Since then the stock has corrected by ~ 12% in the past two months and offers a good entry point for investors. SEL's concentrated efforts to revive topline growth would start yielding results going ahead and we expect the topline and earnings to grow in healthy double digits over the next 2 years. SEL is a quality auto ancillary company with a successful track record of outpacing the industry. Over the years, SEL has successfully diversified from being an auto cable manufacturer to a company having a diverse product profile such as lamps and non-automotive cables, catering to diverse industries. With the best manufacturing practices being adopted with an aim to achieve profitable growth, has enabled the company to maintain its ROE around 20% levels. We reinitiate our viewpoint coverage on SEL with a Positive view and expect a 12-15% upside over the next 8-10 months.
Regards,
F1,Achyuta,111,bharathidasan salai,
Cantonment
Trichy-620001
Tel:04314000706
Ph:8144517351
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