Subros
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs370
Current market price: Rs206
Get ready for a cool ride
Key points
- Play on huge growth plan of Maruti and Tata Motors: Subros is a strong play on the huge growth plan of two of the stalwarts of the domestic automobile industry, Maruti Udyog Ltd (MUL) and Tata Motors Ltd (TML). Both MUL and TML are expanding their capacities which augurs well for Subros, as the latter meets 65% of MUL's and 50% of TML's automobile air conditioning (AAC) system needs.
- Diversifying client base to de-risk portfolio: Subros intends to tap the huge potential of the AAC system market for commercial vehicles (CVs) and utility vehicles, thereby de-risking its client portfolio. It has already received an order from M&M to supply AAC systems for its new model, Scorpio. It has also received a letter of intent from Ashok Leyland Ltd (ALL) and Eicher Motors Ltd (EML).
- Expanding capacities to cater to future growth: The company has undertaken a Rs150-crore expansion plan to be implemented in two phases. In the first phase its installed capacity would be increased by 50% to 7.5 lakh units by April 2006. In the second phase the total capacity would be raised to 10 lakh units by 2008.
- Earnings to grow at 33.8% CAGR: We expect Subros' revenues to grow at a CAGR of 12%. This coupled with a 340-basis-point rise in the operating profit margin to 14.4% shall result in a 32% growth in the net profit over FY2006-08. Outsourcing orders from its collaborator, Denso Corporation, shall provide further upside.
- Buy with a price target of Rs370: At the current levels the stock is discounting its FY2008E earnings by 5.7x and its FY2008E EBIDTA by 2.8x. We believe its valuations are attractive compared with that of its peers, who are trading at 13.5x their FY2008E earnings. We recommend a Buy on Subros with a 12-month price target of Rs370, expecting an upside of 80% from the current levels.