suprajit engineering ltd. (sel) . () buy -...

TM

14 September 2012

A CONSILIUM INFORES & ADVISORS INITIATIVE FOR BALANCE EQUITY BROKING (INDIA) PVT LTD

SEL is World’s largest 2 - wheeler cable manufacturer & largest automotive cable exporter from

India, with a capacity of 125 million cables p.a. It also manufactures cables for 3 & 4 - wheelers

segments and non automotive applications. Company’s profit margins continue to be the best in

the auto component industry. On a consolidated basis SEL sold over 110 million cables in FY ’12,

placing it among the top 5 cable producers in the World.

In the last 25 years, SEL has grown its revenue & EBITDA at CAGR of 33% & 30% respectively (CAGR

for last 10 years - 29% & 28% respectively). The growth is ensured by continued product development and

diversification.

Suprajit Engineering Ltd. (SEL) ` 24.95 (12/09/12) BUY

u With a manufacturing capacity of 125 million cables

annually, SEL serves most 2 - wheelers Original Equipment

Manufacturers (OEMs), both within and outside India.

Its products are used by motorcycle, scooter and moped

manufacturers.

u Capacity expansion by auto OEMs will enable SEL to

grow at decent rate at least for next two years. FY ’13 growth

may not be spectacular in view of low growth of ~ 10% expected

for auto industry. However, auto demand growth should recover

in FY ’14, benefiting suppliers like SEL.

u In last 10 years SEL has expanded capacity 10 times

– from 12.5 million cables in FY ’01 to 125 million in FY ‘12.

Consolidated revenues of the Company have grown ~ 12 x in the

last 9 years indicating consistent fixed asset turnover ratio. Also,

insptie of increasing capacity @25% CAGR in last three years,

capacity utilization has been consistently above 80% explaining

25% plus revenue growth.

u Although SEL is predominantly auto cable producer,

it has fairly widespread revenue profile with a strong product

positioning in each market category. OEMs constitutes majority

of sales – 73%, aftermarket, exports & non-automotive together

contribute 27% of revenues.

u We expect volume growth to drive earnings in future,

as SEL expands capacities to meet robust demand from existing

customers and expand coverage with scalable clients. Apart

from that, revenues from exports & replacement market should

grow at much higher rate as compared to OE segment.

u Considering the auto industry growth in FY ’13, we do

not expect company to grow its earnings by more than 12-15%.

The share is available at ~ 7 x FY ‘13E earnings. Return ratios are

expected to be robust albeit little lower than past years.

Highlights

Share Price Performance

Suprajit Engineering Ltd. is also available on www.balance-equity.co.in

TM

Suprajit Engineering Ltd.

Shareholding Pattern as on June ‘12 (%)

BSE SENSEX/S & P NIFTY 18,000.03/5431Sector Auto Parts & Equipment

Market Cap./Free Float (` Crs.) 298 / 149

Market Price as on 12/09/12 ` (FV ` 1/-) 24.9552 Week High/Low ` 27.25 / 16.10Equity Shares Outstanding (in Crs.) 12P/E Ratio (Times) (for FY ‘12) 8.0P/B (Times) (for FY '12) 2.3EV/EBITDA (Times) (FY ‘12) 4.8ROE % (FY ‘12) 29.3

52%

1%

47% Promoter

DII

Others

TM



Incorporated as a private limited company in 1985, SEL started manufacturing high quality liner cables, to exacting Japanese

standards, for the automotive industry in 1987.

Currently the group caters to a wide spectrum of automotive and non-automotive cable requirements & has expanded capacity

to 125 million cables & 6 lacs speedometers a year. The cable capacity is being increased to 150 million cables in the current year at

a cost of ` 35 Crs. In FY ’12, Company utilized 88% of its cable manufacturing capacity. Company enjoys about 45% market share in

domestic OE market for cables.

Background

Cable Capacity & Cables Produced

TM



Its product portfolio includes automotive cables like brake cables, clutch cables, throttle cables, starting cables, choke

cables, speedometer cables, push pull cables, mirror cables, tail gate cables, tyre lifting cables, gear shift cables, fuel filler cables, head

lock and release cables, window regulator cables, seat belt and seat recliner cables, etc. It also manufactures non-automotive cables

like washing machine cables, material handling equipment cables, earth moving machinery cables and cables for marine applications.

Apart from cables, the company also manufactures speedometers, tachometers, fuel gauges and temperature gauges. Moulded

assemblies, fuel sender unit assembly, link rods etc. have been introduced to cater to requirements of speedometers.

SEL supplies a range of other cable components to customers worldwide. Its new product development cell has developed an

array of new products for OEMs which include tank units, complex engineering parts and assemblies, and specialized components for

OEMs.

Company is pursuing new markets and business segments for product application and are persuading existing customers

to collaborate with SEL for development of new products. New product development group of SEL is working on products that are

expected to be commercialized in the next few years. Company is also looking at inorganic growth opportunities.

Company’s success has largely been due to its ability to do cutting edge research and development for its customers and

products. With multiple development centers across India and Europe, SEL can focus on rapid development of cables for a large variety

of projects and customer requirements.

61%25%

9% 5%

Two wheeler

Automotive

Aftermarket

Non - automotive

Category-wise Business

TM



Critical processes like rolling, coiling, coating, extrusion, moulding, die casting and cable assembly are done in house - making

it one of the largest fully integrated cable manufacturers in the world.

Company has plants strategically located in South, West & North India. The close proximity of plants to customers, enables

SEL to meet demanding production schedules as well as cater to customer specific developmental needs apart from other logistic

advantages. SEL has five plants in Bengaluru out of which one is under implementation. It has one plant in Manesar, Haryana & 2

in Pune, Maharashtra. Out of two plants in Gujarat, one is under implementation at Sanand, the new auto hub. Two plants are in

Uttarakhand & two in Rajasthan which are under implementation. During the year, the expansions of 100% EOU at Bommasandra Indl.

Area and the new 4-wheeler cable plant at Pune were completed.

After market sales & non-automotive businesses are expected to grow well in the current year. Suprajit Automotive – 100%

subsidiary - has bagged significant new contracts and is in the process of adding a new plant within its premises. Two new factories,

one in Bengaluru and one in Pathredi in Rajasthan will go in to production in the current year taking the group capacity to more than

150 million cables. Apart from these, new plants for cables in Bommasandra, Karnataka and Bhiwadi Industrial area, Rajasthan are

also in advanced stages of implementation.

In India most of the leading 2 & 3 - wheeler manufacturers and other auto manufacturers are SEL’s customers. Company

derives 61% revenues from OE 2 - wheelers, out of which Bajaj Auto, TVS Motors & Hero Motors contribute 52%. SEL supplies 80-

100% requirements of many of its 2 - wheeler customers. Assuming these customers plan 10% increase in production in FY ’13, SEL is

expected to grow its volumes by 8-10%. In 4 - wheelers its clientele include M & M, Tata Motors, General Motors, Ford, Hyundai etc. Its

global auto clients include Suzuki, GM, Ford, etc. Non automotive global & domestic customers include JOHN DEERE, PIAGGIO, GE, L &

T, and Godrej etc. It has market share of 25% in 4 - wheelers OE cables market in India with growing potential from big global clients

like BMW, Volkswagen, and Nissan. It is expanding its presence in replacement & non automotive markets also.

FY ’12 saw Indian Auto industry growing by 14% (2 - wheelers – 15.7%) as against 27% in FY ’11. India continues to be the 6th

largest car manufacturer and second largest 2-wheelers manufacturer in the world. This has augured well for the component suppliers

who continue to clock good growth despite the slowing Indian automotive growth. SEL grew 25.6% in FY ’12 & 46% in FY ’11 in its

standalone operations.

TM



87%

13%

Domestic

Global

Geography-wise Business

Replacement market

Domestic market size of automotive cable is estimated to be about ̀ 1000-1200 Crs. with replacement market of another ̀ 500 Crs.

SEL has about 45% market share in OE auto cable market. It is a dominant player in the country due to its cost competitiveness

and customer friendly policies. High set up cost and customization requirements of customers for various models act as entry barrier.

These factors and low per cable cost helps organized players like SEL in replacement market also. Company has dedicated two plants

in Bengaluru for catering to the replacement market with combined capacity of 20 million cables.

9% of consolidated revenues - ` 38 Crs. – was generated from aftermarket sales. Company is hopeful of growing these sales at

a much faster pace than OE segment.

SEL has set up a pan India distribution network of 300 dealers through which it distributes its products to the retail industry

for aftermarket sales. With more than 200 stockists all over the country, SEL has the wide reach. Company is concentrating on this

segment to reduce its dependence on OE market and plans systematic increase in dealers to address replacement market.

The product range includes control and speedometer cables, speedometers & parts, and tank units. Since organized players

have the capacity to produce customized cables for various products, replacement market is increasingly captured by them. The shift

is also helped by low per cable price in the range of ` 25-30

TMSuprajit Engineering Ltd.


Subsidiaries

Company has two wholly owned subsidiary companies for catering to export markets – Suprajit Automotive Ltd. (SAL) - established in 2004 & Suprajit Europe Ltd. (SE) acquired in 2006.

Based in Tamworth in the United Kingdom, SE is Suprajit Group’s technical center to the western world. SE has over 70 years of cable making experience and cutting edge development capabilities. It uses cost competitive manufacturing facilities in India to meet requirements of global customers. It also has world class research and development, prototyping, warehousing and small volume specialist cable manufacturing facilities.

SAL is a 100% export oriented subsidiary of SEL, located near Bengaluru. SAL is specialized in the large scale manufacture of automotive & non automotive cables for supply to customers worldwide. SAL works closely with SE to serve latter’s customers. SAL undertakes manufacturing for exports through its two 100% export oriented plants, one for automotive cables and the other for non-

automotive cables. Both plants are located in Bengaluru.

Global automotive scenario continues to be challenging. The performance of subsidiaries for the year gone by, have been tepid due to difficult market conditions and reduced volumes on existing contracts. However, the outlook for the current and coming years looks bright in view of the new contracts received from marquee new customers. These export businesses would be commercialized during current and next year and expected to give significant boost to the exports of automotive cables from the subsidiaries. A new plant to cater to these new contracts is in the advanced stage of implementation at the 100% EOU in Doddaballapur Indl. Area, Karnataka.

The consolidated sales of the subsidiaries were ` 46.37 Crs. in FY ’12 as against ` 50.59 Crs. in the previous year mainly

due to slowdown in Europe. Subsidiaries also reported lower EBITDA of ` 2.53 Crs. in FY ’12 against ` 7.52 Crs. in the previous year,

while PAT came down drastically to ` 0.17 Crs. from ` 2.73 Crs. in the previous year. Company expects to improve performance of subsidiaries during the current year.

Global customers of SEL include names like GM, Suzuki, Ford, PIAGGIO etc. Global sales contribute 13% of consolidated sales of

the group – ` 55 Crs. in FY ’12.Company also supplies to companies like of BMW, Volkswagen and Nissan on a small scale which have very good potential to grow at a rapid pace. Even non auto cable segment customers, like John Deere, JCB, Brose etc. have good scalability potential. It plans to grow its export revenues by more than 25% over the next two years.

Exports

Suprajit Engineering Ltd. TM


Financials

Raw materials constitute 62-64% of revenues. Steel again constitute 60% of raw material cost and is re-priced daily for OE, thus

practically removing the risk of price fluctuations. Other raw materials include PVC compound, rubber & zinc. Both steel billets

and rubber prices have been on a downward trend on y-o-y basis. Company should be able to maintain its raw material cost between

62-64% for the current year also.

For FY ’12 revenues increased by 22% to ` 424 Crs. aided by strong volume growth at the same rate. Going forward, we expect

revenues to go up by around 15% assuming auto industry to report volume growth of ~ 10%. This growth also may be difficult as,

industry has reported only 4.2 growth in production for April-August 2012 period over previous year. Festival season and pickup in

rural demand after monsoon will be the key to achieving this growth. SEL has generally outperformed auto industry growth. Also new

capacities being set up will add to the volumes. Apart from gaining higher volumes from existing customers, Company expects to grow

at a much faster pace in exports & replacement market.

u Auto industry & economy face several challenges in the form of deteriorating local currency, high interest rates, rising

commodity prices, global slowdown etc.

u As 61% of the revenues of the company is from the 2 - wheeler segment, slowdown in the sector in the ensuing years would

affect its volume growth.

u Delay in revival of the automotive market in Europe and adverse exchange rate movement can affect exports.

u Rising steel & rubber prices can impact raw material costs & hence margins.

Risks & Concerns

Company is a market leader in domestic auto cable market of ` 1000-1200 Crs. with 45% market share. In India it competes with companies like Remson Industries & Acey Engineering in 2 - wheeler segment & with global companies like TSK & Hi-lex of Japan

and Tata Ficosa in 4 - wheelers. Cables are generally supplied Just In Time to the OEMs, requiring location of plants close to the OE manufacturing units for better operational performance & cost efficiency.

Cables requirements per SUV are 22, whereas 4 - wheelers requires 8-10 cables per vehicle, as against 4-6 cables for 2 - wheelers.

Indian auto manufacturers sold 1.73 Crs. vehicles in FY ’12, out of which 1.34 Crs. were 2 - wheelers. Assuming that on an average five cables are required per 2 - wheeler, we estimate cable requirements to be about 7.35 Crs. in FY ’13, presuming 10% growth in sales.

Industry

TM



Consolidated Financial ResultsPeriod Ended (` Crs.) FY '10 FY '11 June '11 Sept. '11 Dec. '11 March '12 FY '12 June '12

Income from Operations 248.51 346.72 92.42 106.14 112.62 112.57 423.75 107.52

Inc/Dec. in Inventories 2.49 -5.19 -3.67 -1.03 3.89 -2.32 -3.13 -1.13

Cost of materials consumed 151.94 225.53 62.99 69.86 70.42 75.76 279.03 68.74

Employee Cost 29.04 41.49 11.37 12 13.07 12.28 48.72 14.24

Other Exp 19.25 28.25 6.25 8.02 8.33 7.89 30.49 8.58

Total Expenditure 202.72 290.08 76.94 88.85 95.71 93.61 355.11 90.43

EBITDA 45.79 56.64 15.48 17.29 16.91 18.96 68.64 17.09

EBITDA Margin (%) 18.4 16.3 16.7 16.3 15.0 16.8 16.2 15.9

Depreciation 6.87 7.23 1.96 1.84 1.85 1.82 7.47 1.88

Interest 6.24 7.4 1.97 2.26 2.62 2.46 9.31 2.2

Tax 10.77 13.46 3.45 4 3.73 3.79 14.97 5.44

Other Income 0.26 4.75 0.61 1.03 1.1 0.19 2.93 0.77

Exceptional Items 1.63 -2.11 0 0 0 0 -2.03 0

Net Profit 23.8 31.19 8.71 10.22 9.81 11.08 37.79 8.34

Share of Profit/(Loss) of As-sociates 0 0.56 0 0 0 0 0 0

Net Profit after SA 23.8 30.63 8.71 10.22 9.81 11.08 37.79 8.34

Net Profit Margin (%) 9.6 8.8 9.4 9.6 8.7 9.8 8.9 7.8

Equity Capital (FV ` 1/-) 12 12 12 12 12 12 12 12

Equity Shares (in Crs.) 12 12 12 12 12 12 12 12

Reserves 58.25 84.92 117.19

EPS (`) 2.0 2.6 0.7 0.9 0.8 0.9 3.1 0.7

Book Value (`) 5.9 8.1 10.8

ROE (%) 33.9 31.6 29.3Note: 1. Company has booked ` 5.18 Crs. profit on sale of land & building in June ‘12 quarter. Not considered for profit calculations.2. Higher tax is a result of tax provision on profit on sale of assets. Net Profit margin in operations is expected to be same at ~ 9.4%

Company has improved its working capital management and reduced leverage ratio over the years. Net working capital days

have come down from 77 days in FY ’08 to 42 days in FY ’12. Debt equity ratio is reasonable at 0.64 x as on FY ’12 down from 1.49 x in

FY ’08. Free cash flow generation from operations was ` 26 Crs. in FY ’12. Company has maintained debtors days at 77 days in FY ’12,

same as last year, in spite of higher volumes.

TM


• • • • • • • • • •


u High inflation and hardening commodity prices, combined with slowing global economy will result in Indian automotive

industry growing at ~ 8-10%, while economy as a whole is expected to grow between 6-6.5%.

u Order flow position from existing customers continues to be robust for cables. Company has been outperforming auto industry

growth through its aggressive marketing, gains in market share and good growth in aftermarket and non-automotive businesses.

Outlook for the current year is also expected to be satisfactory.

u We expect Company to maintain operating margin at ~ 16% as witnessed in FY ’12 and June ’12 quarter.

u All OE customers contribute 85% of sales. SEL can meet increased demand emanating from expansion in capacity by OEMs,

by its proposed expansion in capacity to 150 million cables.

u Aftermarket, export & non automotive segments which together contribute ~ 27% of revenues, offer huge growth potential &

will drive growth in the current year when auto growth is expected to be tepid. However, Company will continue to outperform auto

industry growth as in the past.

Comments

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