17 April 2020

Suprajit Engineering Stock Analysis

Suprajit Engineering Ltd. has delivered multibagger returns over the last decade. However, in the current market correction, the stock has fallen sharply. Infact, the stock is down 66% over the last 2 years. This correction warrants a deeper look into the stock.

Industry Overview

The auto ancillary industry in India is around 60% of the OEM industry. In developed markets, the auto ancillary industry is anywhere between 100% to 200% of the OEMs. The auto ancillary industry in India has low pricing power and high working capital requirements as evident from the low ROCE. Of the major auto ancillary companies in India (Market cap > Rs 250 Crores), only 17 out of 42 have made a ROCE of > 15% in atleast 7 out of 10 years. There is a lag of 3 to 6 months in passing on raw material price hikes to the customer.

OEMs have the largest market share

Business Overview

Suprajit Engineering Ltd. is an auto ancillary company that manufactures cables primarily for the 2&4 wheelers. The company was established in 1985 and is headquartered in Bangalore. The company has its manufacturing presence in India, Europe and North America. The promoter family, led by chairman Ajith Rai, holds a 44.56% stake in the company. The company supplies cables to the leading 2 wheeler and 4 wheeler companies across the globe.

In FY19, 41% of the revenues came from exports. 82% of the revenues came from the cable division and the balance 18% from bulbs. The 2 wheeler segment contributes ~ 36% of the revenues. The auto, non auto and aftermarket contributes ~ 21% to 22% of the revenue each.
In 2014, the company purchased a majority stake in Phoenix lamps, India's largest automotive halogen light maker to de-risk the dependence on cables. In 2016, Suprajit had purchased Wescon Controls, a USA based cable maker for $44.4 Million. This was a move to diversify into the outdoor power equipment sector and de-risk from the dependence on the auto sector. The company has over the last two decades acquired companies to fuel growth.

Financial Overview
Financial Snapshot

  • The company has delivered a revenue growth > 10% in the last 9 out of 10 years
  • The revenue CAGR is 10% for 3 years and 21.55% for 5 years
  • The operating margins have been in the 13% to 18% range but have been trending lower
  • The average tax rate is > 30%, thus lower tax rate will boost the bottom line
  • The last 10 years cumulative PAT is ~ Rs 700 Crores and cash flow from operations is ~ Rs 812 Crores
  • The company has spent ~ Rs 343 crores on Capex over the last 10 years
  • The company has maintained a high ROE of > 20% for the last 10 years except 2019, where the ROE was ~ 18% due to pressure on margins
Valuations
The stock trades at a market capitalization of Rs 1,647 Crores. The M.cap to sales is ~ 1.03x and with a trailing PAT of Rs 144 Crores, the PE ratio works out to be ~ 11.5x. As per the September 2019 results, the company had liquid investments and cash balance of ~ Rs 320 Crores. The borrowings stood at ~ Rs 326 Crores. The company enjoys a low debt-equity ratio.

Suprajit Engineering has a strong balance sheet and has delivered a good financial performance over the last decade. The company is a free cash flow generating business. Suprajit has relied on inorganic avenues of growth and the management seems to be prudent about capital allocation. At current valuations, it makes an attractive BUY although the auto industry fundamentals are weak at the moment and post COVID-19 recovery will take time. Suprajit is a long term investment and investors 

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