Buy Subros; target of Rs 29: ICICIdirect.com

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Buy Subros; target of Rs 29: ICICIdirect.com

ICICIdirect.com is bullish on Subros and has recommended buy rating on the stock with a target of Rs 29 in its February 6, 2012 research report.

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ICICIdirect.com is bullish on Subros and has recommended buy rating on the stock with a target of Rs 29 in its February 6, 2012 research report.

"Subros Q3FY12 results were below our estimates. The top line came slightly above our estimates at Rs 253.8 crore (I-direct estimate: Rs 247.7 crore) reflecting a decline of 7.1% YoY owing to ~13.0% YoY slide in volumes. On a sequential basis, Subros posted a 9.3% volume growth indicative of the gradually ramp up in production of its major client Maruti coupled with strong performance of clients like Tata Motors and M&M. However, the topline growth was restricted by realization fall of 3.4% QoQ. The EBITDA margins came inline with our expectations at 8.6% (up 103bps YoY and 55bps QoQ) owing to benefits from component localization strategy resulting in lesser dependence on Japanese imports. The personnel costs came higher at Rs22.8 crore primarily due to increased localization activities. The reported PAT for the quarter came in at Rs2.1 crore (down 62.5% YoY and 33.7% QoQ) owing to higher than expected depreciation and interest costs."

"Maruti Suzuki has obtained special permission from the RBI to obtain foreign exchange cover on behalf of its key suppliers like Subros. Maruti procures ~90% of its component requirements locally, but many vendors in turn import critical parts, mostly from Japan. For example, compressors used by Subros in its air conditioning system are locally assembled, but the piston used in it is imported from Japan. Currently, Maruti compensates vendors for the forex losses incurred on the import of component parts and thereby providing little incentive for localization. But now, by hedging forex exposure and getting them to share the cost of the cover, vendors are looking at localise sourcing more aggressively. The benefits of the strategy are expected to flow from FY13E."

"We expect margin expansion to continue as localisation strategy mitigates input cost pressures. Moreover, we expect a rebound in the PV segment in FY13E on a smaller base with key client Maruti expected to post ~20% volume growth. At the CMP of Rs 26, the stock is trading at 9.6x FY12E EPS and 4.6x FY13E EPS. We have valued it at 5.0x FY13 EPS of Rs  5.7 to arrive at a target price of Rs 29 implying a potential upside of 12%. We maintain our BUY rating on the stock," says ICICIdirect.com research report.   

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To read the full report click on the attachment