Onward Bound - Suprajit Engineering

Investors rarely find low profile companies attractive. Suprajit Engineering is one such company which will force you to take a second look, with the strong initiatives it is taking to drive its future growth. Capacity expansion, de-risking business by focussing on the non-auto segment, replacement market, openness to inorganic growth, consistent dividend history and lastly, low valuations make it an attractive bet at a CMP of Rs 19.40 (Face Value Rs 1).

Suprajit Engineering (SEL) is a manufacturer of cables and instruments, and with its strategically located capacities, it meets the demand of OEMs in the automotive sector. Nearly 68 per cent of the company’s revenues come from control cables, 18 per cent from speedo cables, almost 7 per cent from speedometers and the balance from others. Almost 60 per cent of its revenues come from the two-wheeler segment, with clients like Bajaj Auto, Hero Honda and TVS Motors, each contributing to about 20 per cent of its revenues. In fact, the company is a market leader in the two-wheeler segment, with a share of 60 per cent of the overall market. The balance 40 per cent comes from the four-wheeler segment, where the company has clients of the likes of General Motors, Tata Motors, Suzuki, M&M and Hyundai.

There are reasons why we believe Suprajit Engineering should do well. SEL is a consistent performer, with its topline and bottomline growing at a compounded rate of 22 per cent and 21 per cent respectively. This performance has strengthened in FY11, wherein the company’s topline and bottomline has grown every sequential quarter. This is indeed commendable. We believe that the growth could also be attributed to the fact that the company’s Haridwar facility commenced operations in Q4FY10. The further 33 per cent rise in capacity in FY11 took the company’s cable capacity to 100 million cables (75 million cables), fuelling growth.

SEL foresees continued growth opportunities and is expanding its capacity by another 50 per cent to 150 million cables. SEL has already acquired 4.2 acres of land in Pathredi, Rajasthan, to cater to the north Indian customers. Land has also been acquired at Bommasandra Industrial area to cater to the south Indian customers. According to SEL’s latest announcement, its expansion in the non-automotive cable segment and production at a new plant at Chakan for the four-wheeler segment are expected to commence by the current fiscal end. All this should derisk the business, and is expected to push SEL’s growth much further.

SEL has already received orders from marquee customers – BMW, Volkswagen, Nissan, John Deere and Brose. That apart, SEL is focussing on the aftermarket segment, which should help in derisking and keeping margins healthy. SEL is  also looking at diversifying its product portfolio within the auto segment. They are not only looking at developing it internally, but are also looking at a suitable target for inorganic growth, which would augur well for SEL in the long term.With regard to the financial performance, for FY11 SEL’s sales increased by 43 per cent to Rs 379.17 crore (Rs 265.78 crore), while profits increased by 50 per cent to Rs 33.30 crore (Rs 22.17crore) during the same period. At these numbers the scrip is available at EV/EBDITA of 4.9x and PE of 7x respectively, which seems low for a briskly growing SEL. It makes sense to grab the scrip with a one year target of Rs 25.