This Auto Ancillary Stock with Attractive Valuations is a Long Term Buy

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Subros Ltd (Current Market Price: Rs 143, Market capitalization: Rs 1,131 crore), a strong leader in the automobile air conditioning systems industry recently announced very tepid and weak figures in the December quarter, led by the economic slowdown and very weak demand from the growth-deprived automobile market.

However, we are extremely bullish and will remain optimistic on Subros Ltd due to its solid and unique leadership status (45 percent market share in passenger vehicle (PV) segment) in automotive air conditioner (AC) parts and components. However, the ongoing correction in the share price (down 40 percent from its April 2019 highs) has made valuations very fair and attractive at 14.7 times FY21 projected earnings.

In Q3 FY20, net revenues dipped by 12 percent year-on-year (YoY) because of low consumption and demand from auto companies. The car industry saw major production overhaul and decline by 16 percent YoY in the quarter gone by. The huge decline was aggravated due to negligible revenue from the home AC segment as Q3 is a seasonally weak quarter for this category.

On the operating profitability side, earnings before interest, tax, depreciation, and amortization (EBITDA) margin squeezed by 77 bps (Year on Year), basically led by a huge spike in raw material prices and negative operating leverage. It was partially offset by lower employee costs.

Indian Automobile Industry outlook

The Indian car industry keeps on going through an unpleasant time. Factors, for example, a debilitating macroeconomic condition, liquidity crunch, non-accessibility of the retail fund, increment in the all-out expense of possession because of strict compulsory long-term insurance, implementation of safety regulations in passenger vehicles (PV) segment, the impact of axle load norms in commercial vehicles (CV) segment have all led to a weaker sales and unfavorable business environment.

Nonetheless, we accept that India’s economic slowdown is recurrent in nature and that the long haul development standpoint keeps on being certain on the rear of low infiltration levels and expanding discretionary cashflow. The Subros the board anticipates that the recuperation should begin in FY21 and anticipates that the organization should outperform the business compared to its peers.

Additional and External factors that make us certain about Subros Ltd

Subros is a dominant market player in providing car AC parts to unique hardware makers (OEM) in India and it keeps on improving its piece of the pie. Its present piece of the overall industry is 45 percent contrasted with 42 percent a year prior, riding on the rear of new requests and a move of item blend from diesel to oil. Authority in the market is on the rear of its product portfolio and quality.

Likewise, Subros is relied upon to do well gratitude to its request pipeline and new successes. It won new business from Maruti Suzuki for S-Presso, the invigorated adaptations of Wagon-R, Ertiga, and from Tata Motors and Mahindra & Mahindra which would keep on supporting development. Further, the organization hopes to be the sole provider of Maruti’s BSVI variant of Brezza.

It has likewise entered universal markets with the huge orders to supply parts to Renault Nissan for its models in Brazil and to a Suzuki model in Indonesia. These would open up another revenue channel for the organization and help enhance its income sources also.

Another significant trigger for the development is the required fitting of ACs or air blowers in truck lodges in the N2 (3.5-12 ton) and N3 (12-ton above) classes. Subros has accomplished a 70 percent piece of the overall industry right now well. The complete yearly industry open door for the organization due to this is around Rs100-450 crore.

Aside from trucks, Subros likewise supplies part to the railways where it has accomplished a piece of the overall industry of 77 percent. To additionally broaden its business, it has cooperated with Whirlpool to supply condensers for room Air Conditioners which has opened up another line of business for the organization and fortified its top line. Truth be told, in the home AC fragment, it is receiving huge orders from Voltas and Havells.

Reasonable and Fair valuations make it a Safe Long Term Bet.

Subros’ Share price has sharply corrected 34 percent from the highs of April 2019 making valuations low risk and sensible. The stock at present exchanges at 14 times FY21 anticipated income.

Subros Ltd Threat and Risks

A primary risk and huge threat are from crude oil price and currency huge volatility and fluctuations, as plastics are its basic raw material. Another risk is a huge slowdown in the volumes of Maruti Suzuki (accounts for 70 percent of Subros’s business). Lastly, slower adoption of air blowers and/or ACs in trucks could also be the main factor to limit growth.

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