Recommendation from Auto Ancillaries - Others

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

SUPRAJIT ENGINEERING : A COMMANDING PRESENCE

HERE IS WHY
✓Strong order book
✓Increasing market share
✓Profitable acquisition and expansion

The automotive ancillary sector is a significant component of the Indian economy. It represents roughly 2.3 per cent of the country’s GDP. Going by the GDP growth rate predicted by various economic agencies, we believe that domestic automotive sales will be strong going ahead and hence we have picked Suprajit Engineering, a company that has an impressive domestic presence in the automotive ancillary sector. The company has about 65 per cent market share in the Indian two-wheeler segment and about 30-35 per cent market share in the four-wheeler cable industry. Along with its well-established domestic presence it also commands a significant share in the export market.

Suprajit Engineering is one of the largest automotive cable and halogen bulb maker with an annual global cable capacity of 400 million cables and 110 million halogen bulbs. Its customers’ list includes most of the Indian automotive majors. It has many marquee global customers too. The company has six different business segments which include the Domestic Cable Division (DCD), Suprajit Automotive Limited (SAL), Suprajit Europe (SEU), Suprajit Engineering Non-Automotive Division (SENA), Phoenix Lamps Division (PLD), Light Duty Cable Division (LDCD) and Suprajit Technology Centre and Electronics Facility (STC). 

Overall, the business segment of the company has a robust order pipeline even with subdued global demand. The domestic demand remains robust with rural demand expected to pick up due to the forthcoming wedding season. In the Light Duty Cable Division the company has also won new contracts. The company enjoys good rapport with all the major two-wheeler and passenger vehicle (PV) OEMs in India. It has a wallet share of more than 75 per cent with most of its key customers. In April 2022, Suprajit Engineering completed the acquisition of Kongsberg Automotive ASA’s light duty cable business unit. The acquired business consists of cables, supplying primarily to the US, Europe and APAC in the automotive and off-highway application segments. 

Post this acquisition, Suprajit Engineering’s revenue contribution from exports increased to about 53 per cent in H1FY23 from 38 per cent in FY22. The revenue of the company has been growing at a five-year CAGR of 9 per cent, which has accelerated to around 40 per cent in the last 12 months. The company delivered strong results in Q3FY23 with an increase of 44 per cent in revenue on YoY basis which stood at ₹692 crore. The operating profit of the company stood at ₹81 crore, which increased 50 per cent on a YoY basis and 3 per cent on a QoQ basis.

Despite muted demand from the two-wheeler segment, the OEM and aftermarket performance has been robust for the company. The company’s new facility of comprehensive aftermarket cable operation is expected to commence its operations soon. This will give additional room to the company in the aftermarket segment. Its stock is currently trading at a TTM PE of 33 times and the price to book value is 4.55 times. The company’s latest ROE and ROCE are at 15.9 per cent and 17.3 per cent, respectively. It is expected to deliver good results in Q4FY23 and beyond. With institutional investors and promoters increasing their stake over the last few quarters and a consistent demand for its products, we recommend BUY