Suprajit Engineering Ltd Research Report By Nalanda Capital

Suprajit Engineering Ltd.

STRONG BUY

Suprajit Engineering, headquartered in Bangalore was established in the year 1985 is one of the global leader in manufacturing of two-wheeler automotive cables. It manufactures cables across all the segments of automotive industry and gradually gaining market share. We initiate a coverage on Suprajit Engineering Ltd (SEL) recommend a ‘Strong Buy’ with a fair value of INR 280, implying a 22.9% upside potential from the current levels. Our view stems on the fact that a) SEL is quick in acquiring OEMs in low penetrated 4Ws segment. b) Increasing touch base in the gigantic aftermarket. c) Expanding into newer segments in nonautomotive cables. d) Strategically looking for acquisitions into LEDs & other segments. e) Growing in extensive export market.

In our new segment 'Hunting For Value' today I put the spotlight on Suprajit Engineering. i talk about what led to the 20% fall this year and what are the triggers for reversal ? all feedback welcome https://t.co/f2YTX6gRjI

— Sonia Shenoy (@_soniashenoy) June 14, 2018

King-sized Opportunity in Aftermarket and Exports

Suprajit is present in ~20,000 touch points across India and we believe the opportunity size of the aftermarket is as big as OEMs. Post GST, the management too has observed a gradual shift from unorganised to organised players. The company looks serious in expanding its base and the margins are higher too in the aftermarket vis-à-vis OEMs. On the exports front, post acquisition of the Wescon Controls, Suprajit can possibly try to cross-sell its products to Wescon’s clients, where the market is gigantic. The company aims to double the size of automotive exports by FY21E vs. FY18.

Prospects of Entering into LEDs

The company in the past has successfully acquired five companies in total and continues to seek newer possibilities for overseas as well as domestic growth in Cables/Lamps. Suprajit is among the leaders in manufacturing of Halogen bulbs and there are enormous possibilities for the company to enter into manufacturing of LED bulbs, which we believe is the trigger point for the growth ahead.

Increasing Share in Automotive Cable Business

Suprajit is the market leader in 2W cable manufacturing with ~70% market share. It’s focus is now to increase the market share in 4Ws especially PVs, where the penetration level is low and the size of the pool is large. It’s market share in 4Ws increased from 20% five years ago to 35% in FY18 and we believe there are high chances of the PV leader to get on client board in the near future. This will substantially improve the market share of Suprajit. Additionally, the number of cables post BS6 will increase in all the vehicles.

Expanding into Newer Segments in Non-Automotive Cables

AXIS DIRECT ON SUPRAJIT ENGINEERING
PICK OF THE WEEK
TGT 265
BUY pic.twitter.com/teOBr093qC

— SONAM MEHTA (@sonamcnbcawaaz) July 23, 2018

In FY02, Suprajit was not present in non-automotive, however, the revenue contribution from it has increased to 16% in FY17 and 21% in FY18. The company manufactures cables for tractors, construction equipment machineries, etc., and recently started manufacturing a cable for washing machines. We believe the company has options to gradually enter into newer segments and acquire more customers. Here, not only the volume growth will be huge, but also margins are 5% higher than 2W cables.

Scarcity Premium: Suprajit Engineering is the only large automotive cable manufacturer listed on the exchange and hence, we believe once recognised by the market participants, it will continue to get the scarcity premium. Its major competitors are from China and South Korea.

Trading at an Eye-Catching Valuations

Based on the investment rationales discussed, we strongly believe in the company’s business model and its potential growth in the medium to long term on account of its competitive positioning.

We trust that the company is very ethical, well-diversified, a consistent performer and all this along with the stability in terms of performance should continue. Currently, the company is trading attractively at a P/E of 16.7x and EV/EBITDA of 9.6x FY21E.

We recommend a Strong Buy on Suprajit Engineering with a average fair value of INR 280 per share, valuing the company with P/E and EV/EBITDA Methodology. In the past three years, it use to trade at a forward P/E of ~20x and EV/EBITDA of ~11.5x. We have assigned similar multiples on account of huge potential and growth opportunities.