Suprajit Engineering Ltd. share price target

Q4 consolidated EBITDA was 8%/17% ahead of our/consensus estimate on strong standalone/ Wescon performance.

Suprajit Engineerings (SEL) consolidated 4QFY17 results were a strong beat, with robust performance of SELs cable business. PLLs performance was weak owing to absence of sale of H7 bulbs.

Suprajit has consistently outperformed auto ancillary pack on revenue/ EBITDA CAGR over the past decade while maintaining RoCE at ~30%. With current utilization levels below 65% across product lines, the company is well-placed to capitalize on growth opportunities over the next 2-3 years.

Suprajit Engineering Ltd: Leadership maintained in domestic auto industry, Suprajit 2.0 The transformation, De-riskingthebusiness

Suprajit Engineerings (SEL) consolidated 3QFY17 results came in below expectations owing to the weak performance of its cable business (effect of demonetisation) and a seasonally weak quarter for Wescon Controls. APAT came in lower than estimates at Rs 213mn ( 7% YoY), largely driven by a lower EBITDA margin at 15.3% (-120 bps YoY).

Consolidated sales recorded a growth rate of 10.7%/7.3% QoQ/YoY during Q2FY17 standing at Rs. 2816Mn and EBITDA improved by 14.2%/14.8% QoQ/YoY during this quarter where EBITDA margins worked out to be 16.6%, up by 51bps and 109bps as compared to Q1FY17 and Q2FY16 respectively due to raw material price cuts. PAT increased by 36.2%/ 53.6% in QoQ/YoY driven by revenue growth and gain in current investments.

Suprajit Engineering (SEL) has a enviable track record of reporting robust (20% ) revenue/APAT CAGR over the past decade further complemented by best-in-class RoCEs (30% ) driven by customer diversification, prudent cost control, market share gain and high capital efficiency.

Suprajit's Q2 consolidated EBITDA was 5% lower than estimate,as strong standalone performance was offset by 18% YoY decline in Phoenix Lamps' revenue. Suprajit has started consolidating Wescon Controls, USA (20 days during the quarter) and it will aid profitability (~17% margin) and further dive..

Suprajit Engineering (SEL) has acquired 100% stake of Wescon Controls, Wichita, USA, through its wholly owned subsidiary Suprajit USA Inc from Shell Topco LP managed by a PE fund Nova Capital, UK. SEL is strategically working towards diversifying its revenue streams by acquisition of different business (earlier acquisitions being Pricol’s speedo cable biz and Phoenix Lamps). We believe this acquisition is a strategic fit for SEL business as it will help to cater non auto cable business, which currently contributes only 3% to total revenue. This is expected to increase to 20% post the acquisition. As per the estimated EV of USD 44.4mn, the deal valued at ~7x EV/EBITDA and 1.1x EV/Sales looks fair.

Post this acquisition, we foresee SEL’s topline growing by ~21-22% with marginal improvement in EBIDTA margins. However, higher depreciation and interest cost will result in only 1%/5% growth in earnings in FY17/18E. As the acquisition has been partly funded through debt, Net D/E could go up marginally to 0.7/0.3 in FY17/18E. They upgrade our TP of Rs 224 (18x SEL’s consolidated FY18E EPS) to include Wescon’s numbers. BUY