Suprajit Engineering Ltd. share price target

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

 

Suprajit Acquires Wescon Controls USA: Suprajit acquired US-based Wescon Controls, manufacturer of control cables in the non-automotive Outdoor Power Equipment (OPE) space by purchasing 100% outstanding equity share capital from Shell Topco LP managed by a private equity fund- Nova Capital, UK for an enterprise value of US$ 44.4 Mn.

Expected Synergies from the deal  - Diversification of segments: Suprajit primarily caters to automotive cables through both domestic channels and exports; and with this acquisition, they have the scope to expand to other non-automotive sectors scaling up to 20% of their revenue chunk from a nominal portion. Enhanced geographical presence: Wescon, being positioned in North America, lays road for Suprajit to expand its presence across those regions. Similarly, Suprajit’s presence in Europe and Asian countries will be an added advantage to Wescon. Capacity scale-up and Technological Up-gradation: The overall capacity is expected to reach 250 Mn cables from the current 225 Mn cables. Further, it enables exchange of technical competence between the two. Supply chain strategies to bring in purchasing benefit for Wescon whilst paving way for cross selling strategies for Suprajit. This Suprajit Wescon deal is expected to get consolidated and the full quarter financial impact starting Q3FY17E.

Diversification of Product Portfolio to Fuel Growth prospects: Exports to be a key driver - Aided by higher penetration in the passenger marketto luxury OEMs like BMW, Mercedes and Nissan, Suprajit has procured new orders for their cables division which is expected to be recorded in FY18E. Currently, thegeographical mix for SEL (incl Phoenix) stands at 65.0% domestic and 35.0% global, as compared to 34.0% for exports during Q4FY16.

Valuation and Outlook : At CMP of Rs. 191, the stock is currently trading at 11.9x FY18E EV/EBITDA. With increasing exports and the synergies expected to arise on account of Phoenix acquisition, we value the company at 13.5x EV/EBITDA having a target price of Rs.224 with an upside of 17%. Therefore, we recommend “BUY” rating on SEL with a target price of Rs.224 having an upside potential of 17%.

Suprajit Engineerings (SEL) consol 1QFY17 results were a miss QoQ owing to topline de-growth of 7% and EBIDTA margin contraction of 115bps (led by negative operating leverage). SEL standalone has reported robust topline growth ( 16% YoY) ahead of industry volume growth owing to increased wallet share with HMSI (40% ).

Suprajit Engineerings (SEL) consolidated 4QFY16 results, including Phoenix Lamps (PLL), were ahead of expectations. It reported a robust topline (5% QoQ) with growth in the 2W/4W OEM segments at SEL and strong export aftermarket growth at PLL.

Exports a key driver: Exports was 34% of revenues (19% of standalone sales) for FY16 vs 14% in FY15. Supplies to premium customers such as BMW for their plant in Germany speaks volumes of the company's quality of operations \ product. Also, OEMs internationally and especially in EU have held up new model launches until the sitution and sentiments...

Suprajit Engineering (SEL) has proposed a merger with Phoenix Lamps (PLL). The share swap ratio of 4:5 implies 6.5% dilution. We believe that this move indicates SEL management?s conviction in bringing about meaningful improvement in PLL?s operations.

Suprajit Engineerings (SEL) 3QFY16 results including Phoenix Lamps (PLL) came in ahead of expectations. SEL?s (consol ex-PLL) APAT at Rs 170mn ( 42% YoY, 88% QoQ) was above estimates (8%). It reported a robust topline (12% YoY) on the back of growth in the 2W/4W OEM segments. Soft commodity prices drove strong EBITDA margin expansion (70bps YoY, 200bps QoQ) to 16.2%.