01-Feb-18

Key Highlights of the Report:

52wk Range H/L

Mkt Capital (Rs Cr)

Av. Volume (,000)

We expect RoE of 22% and 26% in FY19 and FY20 respectively.

Financials/Val. FY16 FY17 FY18E FY19E FY20ENet Sales 1,311 1,554 1,844 2,196 2,599

EBITDA 152 167 194 251 321

EBIT 66 79 111 168 243

PAT 24 14 63 105 159

3QFY18 2QFY18 1QFY18 EPS (Rs) 4 2 11 17 27

Promoters 40.0 40.0 40.0 EPS growth (%) 20% 88% 41% 65% 52%

Public 60.0 60.0 60.0 ROE (%) 7% 13% 16% 22% 26%

Total 100.0 100.0 100.0 ROCE (%) 13% 16% 21% 29% 36%

BV 56 58 66 81 101

P/B (X) 1.6 3.6 5.1 4.2 3.4

1Mn 3Mn 1Yr P/E (x) 22 28 32 20 13

Absolute 10.4 24.7 89.7

Rel.to Nifty 5.7 18.0 60.9 ABOUT THE COMPANY

The main clientele include: Maruti Suzuki, Tata Motors, Mahindra &

Mahindra, Force motors, Ashok Leyland, Nissan, Indian railways etc.

Subros Ltd (SUBROS) was established in 1985 as a JV between Suri

Group (40% stake), Denso Corporation (technology partner; 13% stake),

and Suzuki Motor Corporation (13% stake). The company is India’s

leading manufacturer of automotive AC systems, with a market share of

40%.

RoE to improve sharply in FY20Based on the strong demand outlook of passenger vehicle industry and

new launches by OEMs, we expect Revenue and PAT to grow at CAGR

of 19% and 52% respectively, in FY17-20E. Hence, we value SUBROS at

Rs.375 (14.2x FY20E EPS) and recommend ACCUMULATE rating on the

stock.

It has four manufacturing facilities in India (Noida, Manesar, Pune,

Chennai and Sanand) and has an annual capacity of 1.5mn AC kits.

The company has the capability to manufacture compressors,

condensers, heat exchangers, and all the connecting elements that are

required to complete the AC loop.

SUBROS is the market leader in the Indian passenger vehicle AC with a

market share of approx 40%. Maruti Suzuki is the biggest client for the

company which contributes 70% of the SUBROS top-line.

Upside 10%

442/173

2,050

73

11028

Target Price 375

Previous Target Price 297

The company reported handsome revenue growth of 20%YoY in 3QFY18,

primarily driven by strong passenger vehicle sales during the quarter.

CMP 341

PAT Margin improved by 278bps YoY and 60bps QoQ to 3.7% mainly on

account of increasing localization and benefit of operating leverage.

INDUSTRY - AUTO ANCILLARY

NAVEEN KUMAR DUBEYNaveen.dubey@narnolia.com

Narnolia Securities LtdPlease refer to the Disclaimers at www.narnolia.com

BLOOMBERG SUBR IN

BSE Code - 517168

NSE Code - SUBROSNIFTY -

Company Data

Stock Performance %

Shareholding patterns %

6% 7%

13%16%

22%

26%

0%

5%

10%

15%

20%

25%

30%

RoE

80

100

120

140

160

180

200

220SUBROS NIFTY

Financials 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 YoY % QoQ% FY16 FY17 YoY %

Net Sales 373 415 415 497 449 20% -10% 1,311 1,554 19%

Other Income (0) 0 1 3 4 1138% 49% 3 3 33%

COGS 254 284 288 355 310 22% -13% 883 1,067 21%

Employee Cost 39 40 41 45 48 21% 6% 134 157 17%

Other Expenses 38 46 41 43 43 14% 1% 142 163 15%

EBITDA 42 46 44 54 48 14% -12% 152 167 10%

Depreciation 21 22 21 23 24 14% 5% 87 88 2%

EBIT 21 24 23 32 24 14% -25% 66 79 20%

Interest 10 11 9 10 10 -3% 0% 42 42 1%

PBT 10 13 14 24 18 79% -26% 26 40 52%

Exceptional Item 8 7 1 1 - 0% -100% - 31 0%

Tax (1) (1) 3 8 1 220% -82% 2 (5) -299%

PAT 3 7 11 15 16 402% 9% 24 14 -42%

Healthy revenue growth of 20%YoY driven by strong PV sales

PAT grew by 402% YoY to Rs.16 crores in 3QFY18.

Net sales trend COGS and Gross Margin trend

Narnolia Securities LtdPlease refer to the Disclaimers at the end of this Report

Quarterly Performance

Tax rate for the quarter stood at Rs.1.47 crore, which was lower due to reduction in investment

allowance. Going ahead the tax rate will remain in the tune of 30%.

The company reported healthy revenue growth of 20%YoY in 3QFY18, which was primarily driven

by strong passenger vehicle sales during the quarter.

Subros contributes around 70% of Maruti's sales volume and Maruti grew handsomely by 11%YoY

during 3QF18. Strong demand for premium segment cars led to this growth. New launches from

other OEMs (Tiago and Kwid) have also fared well for the company.

EBITDA grew by 14%YoY to Rs.48 crores in 3QFY18. Increasing localisation and benefit of

operating leverage during the quarter were the main reasons for growth in EBITDA.

Interest expense also declined by 3%YoY to Rs.10 crores due to repayment of long term

borrowings during the quarter.

32

9

36

0

32

2

43

3

37

3

41

5

41

5

49

7

44

9

17% 17% 9%

34%

13%15%

29%

15%

20%

0%

5%

10%

15%

20%

25%

30%

35%

40%

-

100

200

300

400

500

600

Net sales Growth YoY

22

1

24

4

22

1

30

8

25

4

28

4

28

8

35

5

31

0

33% 32%31% 29%

32%32% 31%

29%31%

26%

27%

28%

29%

30%

31%

32%

33%

34%

-

50

100

150

200

250

300

350

400

COGS Gross Margin

Margin % 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 YoY(+/-) QoQ(+/-) FY16 FY17 YoY(+/-)

Gross Margin 32% 32% 31% 29% 31% -1.06% 2.3% 33% 31% -1.3%

EBITDA Margin 11% 11% 11% 11% 11% -0.61% -0.3% 12% 11% -0.9%

PAT Margin 1% 2% 3% 3% 4% 2.78% 0.6% 2% 1% -0.9%

EBITDA and EBITDA Margin trend PAT and PAT Margin trend

Market share 40% in passenger vehicle AC segment.

Revenue growth guidance for FY19 is around 15-17%

Radiator business revenue target for FY18 is around Rs.200 crores and for FY19 Rs.240-250 crores.

Railways Business Revenue: Rs.20-25 crores per annum going forward.

Debt reduction Rs.20-25 crores in FY18 and Rs.50-60 crores in FY19.

Truck AC business can fetch maximum revenues in the tune of Rs.175-200 crores.

Tax rate 30% for FY18 and FY19.

Import content is 40% of sales and the management has plans to reduce it to 20-25% in next 2-3 years.

Current capacity utilization is around 90%.

Narnolia Securities LtdPlease refer to the Disclaimers at the end of this Report

Gross Margin soared 230bps QoQ to 31% on the back of increasing loaclisation and other cost cutting

initiatives taken in 1QFY18. The major raw material for the company are Aluminium and Poly

propelene. EBITDA Margin contracted by 61bps YoY and 30bps QoQ mainly due to higher fixed cost on Gujarat

Plant which has moved to the second shift during the quarter.

PAT margin expanded by 278bps YoY and 60bps QoQ to 3.7%.

Concall Highlights:

Currently Cars and Non cars mix is 90:10 and the management expects mix to reach 80:20 in next 2

years.

The government has made installation of AC or blowers in the truck cabins mandatory from 1st

January 2018. Subros has already tied up with major OEMs (Ashok Leyland, Tata Motors, M&M, SML

ISUZU) and as stated by the management Subros has market share of around 70% with these

customers.

Capex guidance of Rs.74 crore for FY18. Large chunk of this capex will be spent on new product

development and rest will be towards capacity bottlenecks.

EBITDA margin can move towards 13.5-14% range in next 2 years. The major drivers would be

increase in the mix of new business and localisation.

Improving Localisation and Operating leverage benefit drives PAT margin in 3QFY18

39

40

33

45

42

46

44

54

48

12%11%

10%

10%11% 11% 11%

11%

11%

9%

10%

10%

11%

11%

12%

12%

13%

-

10

20

30

40

50

60

EBITDA(Rs. Crore) EBITDA Margin6 8 (1

)

5 3 7 11

15

16

2% 2%

0%1% 1%

2%

3%

3%4%

-1%

-1%

0%

1%

1%

2%

2%

3%

3%

4%

4%

(4)

(2)

-

2

4

6

8

10

12

14

16

18

PAT(Rs. Crore) PAT Margin

Maruti Suzuki volume growth to continue Capacity Utilization to improve going ahead

Sharp reduction in imported raw materials Car AC component value share

Localisation to play vital role in Gross Margin improvement: Subros has focused approach to

increase localisation in order to reduce material cost and this exercise can shoot up the gross margin

by 350-400 bps in next 2-3 years. Currently the raw material import is about 42-45% of total RM cost

but the management has clear strategy to bring it down to 30% in next two year time by increasing in-

house manufacturing of critical components like evaporators and heat exchangers.

Capacity expansion drive in-line with Maruti Suzuki: The capacity expansion plan is also on cards

in-line with Maruti Suzuki which will complete by FY19. Currently, the company has 1.5 mn units per

annum capacity and it will become 1.75 mn units per annum by FY19. The expansion is taking place in

its Gujarat plant, which supplies to Maruti for its Baleno models. Thus SUBROS is making itself ready

to serve Maruti's future requirement.

Narnolia Securities LtdPlease refer to the Disclaimers at the end of this Report

Investment Arguments:

Mandatory AC or Blower units for Truck cabins: Government has mandated Air conditioner or

blower facility in M&HCVs from 1st Jan 2018. The company has already tied up with major OEMs like;

Ashok Leyland, Tata Motors, SML Isuzu and M&M. As per management the incremental market for

Truck AC is around 250-300K trucks per year.

Single largest supplier to Maruti Suzuki: SUBROS is the largest supplier of Passenger vehicle air

conditioners systems to Maruti and caters almost 70% of Maruti's volume. In the recent past the

company remained the biggest beneficiary of successful model launches from Maruti and currently it

caters all the well liked models; Alto, Baleno, Brezza, Dzire and Swift. Going forward we expect

Maruti's volumes to grow at 10% CAGR for next two years based on the strong demand outlook.

1.5

1.5

1.5

1.5

1.5

1.5

1.7

5

64% 61% 64%

74%80%

90% 80%

0%

20%

40%

60%

80%

100%

1.2

1.3

1.4

1.5

1.6

1.7

1.8

Capacity (in mn units) Utilization Trend

55% 54% 53% 51%

43%45% 46% 47%49%

57%

0%

10%

20%

30%

40%

50%

60%

Imported Indigenous

40%

35%

10%

15%

Compressor HVAC Hose pipe & Tubes Condenser

1,1

71

1,1

55

1,2

92

1,4

29

1,5

69

1,7

71

1,9

43

2,1

13

3% -1%12%

11% 10%

13% 10%9%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

-

500

1,000

1,500

2,000

2,500

Volumes (in'000) Growth YoY

Strong cash generation will lead to reduction in debt Return ratios to improve sharply in FY20

View & Valuation

SUBROS is the market leader in the Indian passenger vehicle AC with a market share of approx 40%.

The company has posted handsome revenue growth of over 20%YoY to Rs.449 crores in 3QFY18.

This growth was mainly driven by robust growth in the passenger vehicle segment. Maruti Suzuki, the

biggest client for the company which contributes nearly 70% of the SUBROS top-line, has grown by

over 11%YoY. However EBITDA margin declined by 60 bps YoY due to higher fixed cost on Gujarat

Plant which has moved to the second shift of production in 3QFY18. PAT grew by 402% YoY to Rs.16

crores on account of lower tax expense during the quarter.

Going ahead Passenger vehicle industry is set to grow at 10-12% CAGR for next 3-4 years,

considering the lower car penetration, improving rural income and new launches by OEMs. However,

Maruti has set an ambitious target to sell 2 million cars by 2020. Therefore, capacity expansion plan of

SUBROS is also on cards in-line with Maruti Suzuki which will complete by FY19. The government has

mandated Air conditioner or blower facility in M&HCVs from 1st Jan 2018. The company has already

tied up with major OEMs and as per management the incremental market for Truck AC is around 250-

300K trucks per year. The management is also focusing on to increase localization in order to reduce

material cost and this exercise can shoot up the gross margin by 350-400 bps in next 2-3 years. The

company has also forayed into new business verticals like; Home AC, Refrigerated trucks and

Railways segment. Currently, these segments contribute around 7-8% of total revenues but in next 2

years, the contribution is likely to increase in the range of 15-20%.

Based on the strong demand outlook of passenger vehicle industry and new launches by OEMs, we

expect Revenue and PAT to grow at CAGR of 19% and 52% respectively, in FY17-20E. We expect

RoE of over 26% in FY20E. Hence we value SUBROS at Rs.375 (14.2x FY20E EPS) and

recommend ACCUMULATE rating on the stock.

Narnolia Securities LtdPlease refer to the Disclaimers at the end of this Report

11%13%

16%

21%

29%

36%

6% 7%4%

16%

22%

26%

0%

5%

10%

15%

20%

25%

30%

35%

40%

RoCE RoE

1.05

0.89 0.94

0.71

0.48

0.33

-

0.20

0.40

0.60

0.80

1.00

1.20

Debt to Equity

Income Statement Rs in Crores Key Ratios

Y/E March FY17 FY18E FY19E FY20E Y/E March FY17 FY18E FY19E FY20E

Revenue from Operation 1,554 1,844 2,196 2,599 ROE 4.0% 16.0% 21.6% 26.3%

Change (%) 19% 19% 19% 18% ROCE 15.6% 20.5% 29.2% 36.4%

Other Operating Income 3 12 17 17 Asset Turnover 1.4 1.5 1.7 1.8

EBITDA 167 194 251 321 Debtor Days 30.8 32.0 31.0 31.0

Change (%) 10% 16% 29% 28% Inventory Days 48.2 48.2 48.2 48.2

Margin (%) 11% 11% 11% 12% Payable Days 41.9 55.0 50.0 50.0

Dep & Amortization 88 84 83 78 Interest Coverage 1.9 3.1 4.7 7.4

EBIT 79 111 168 243 P/E 91.1 32.1 19.5 12.8

Interest & other finance cost 42 36 36 33 Price / Book Value 3.6 5.1 4.2 3.4

Other Income EV/EBITDA 8.5 11.2 8.4 6.2

EBT 40 87 149 227

Exceptional Item 31 2 - -

Tax (5) 22 45 68 Assumptions

Minority Int & P/L share of Ass. - - - - Y/E March FY17 FY18E FY19E FY20E

Reported PAT 14 63 105 159 Revenue 1,554 1,844 2,196 2,599

Adjusted PAT 14 63 105 159 Revenue Growth 19% 19% 19% 18%

Change (%) -42% 355% 65% 52% COGS (% of Revenue) 69% 70% 70% 68%

Margin(%) 1% 3% 5% 6% Capex(Rs crore) 90 84 83 78

Debt (Rs. Crore) 329 280 230 200

Balance Sheet Rs in Crores Cash Flow Statement Rs in Crores

Y/E March FY17 FY18E FY19E FY20E Y/E March FY17 FY18E FY19E FY20E

Share Capital 12 12 12 12 PBT 9 87 149 227

Reserves 337 385 471 592 (inc)/Dec in Working Capital

Networth 349 397 483 604 Non Cash Op Exp 88 84 83 78

Debt 329 280 230 200 Interest Paid (+) 42 36 36 33

Other Non Current Liab 29 4 4 4 Tax Paid (2) (22) (45) (68)

Total Capital Employed 507 540 576 666 others

Net Fixed Assets (incl CWIP) 646 690 669 652 CF from Op. Activities 111 232 178 241

Non Current Investments (inc)/Dec in FA & CWIP (142) (127) (61) (61)

Other Non Current Assets 60 9 9 9 Free Cashflow (31) 104 116 180

Non Current Assets 60 9 9 9 (Pur)/Sale of Investment

Inventory 205 244 290 343 others 66 - - -

Debtors 131 162 186 221 CF from Inv. Activities (76) (130) (61) (61)

Cash & Bank 9 12 23 102 inc/(dec) in NW

Other Current Assets 98 47 56 66 inc/(dec) in Debt 10 (49) (50) (30)

Current Assets 444 474 566 742 Interest Paid (45) (36) (36) (33)

Creditors 178 278 301 356 Dividend Paid (inc tax) (6) (15) (19) (38)

Provisions 1 2 2 2 others 7 - - -

Other Current Liabilities 263 59 71 84 CF from Fin. Activities (34) (99) (105) (101)

Curr Liabilities 443 516 550 619 Inc(Dec) in Cash 1 2 11 79

Net Current Assets 1 (42) 15 123 Add: Opening Balance 2 9 12 23

Total Assets 1,150 1,197 1,267 1,427 Closing Balance 3 12 23 102

Financials Snap Shot

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