PICK OF THE WEEK

SUBROS Ltd. Dec 18, 2017

Industry CMP Recommendation Add on dips to Target Time Horizon

AUTO Rs. 264 Buy at CMP and add on Dips Rs. 264-245 Rs. 318 4 Quarters

Subros Limited, founded in 1985, is a joint venture public limited company with 40% ownership by Suri family of
India and 13% ownership each by Denso Corporation & Suzuki Motor Corporation of Japan. The company deals
with manufacturing thermal products for automotive applications in technical collaboration with Denso. Their main
product base includes compressors, condensers, heat exchangers and all connecting elements required to complete
HDFC Scrip Code SUBLTD AC loop. Subros cater to most segments viz. Passenger Vehicles (PV), buses, trucks, refrigeration transport, off-
BSE Code 517168 roaders and railways. Their main clientele includes: Maruti Suzuki, TATA Motors, Mahindra & Mahindra, Force
NSE Code SUBROS motors, Ashok Leyland, Nissan, Indian railways etc.
Bloomberg SUBR IN We recommend Subros as BUY at CMP of Rs. 264 and add on declines at Rs. 245 for the target of Rs. 318 in the
CMP as on 15 Dec’17 264 time frame of 4 Quarters.
Equity Capital (Rs 120
mn)
Face Value (Rs) 2 Investment Rationale:
Equity O/S (mn) 60
Strong Clientele Base
Market Cap (Rs mn) 15717
Book Value (Rs) 58
Subros manufactures compressors, condensers, HVAC (heating, ventilation, and air conditioning) and all
Avg. 52 Week Vol 88330
connecting elements required to complete the AC loop. It caters to all major segments viz. PVs, buses, trucks,
52 Week High 290 refrigeration transport, off- roaders & railways. Their main clientele include: Maruti Suzuki, TATA Motors, Mahindra
52 Week Low 132 & Mahindra, Force motors, Ashok Leyland, Nissan, Whirlpool for home ACs and Indian railways.

Shareholding Pattern (%) Subros is supplying close to 60% of the total AC requirement of MARUTI which entails ~80% of Subros’ revenue.
Promoters 40.0 Subros is having all three high selling models, Baleno, Brezza and Ignis under its belt and enjoys most from
Institutions 34.3 MARUTI’s gain. MARUTI has outperformed the passenger vehicle industry in FY17 (320bps market share gain in
Non Institutions 25.7 past 3 years).

Apart from MARUTI, the company also supplies ACs to other high selling models like Kwid (Renault), KUV 100
PCG Risk Rating* Yellow
(M&M), and Tiago (Tata Motors).
* Refer Rating explanation

Recently the company tied up with Renault to supply condenser in Brazil. Currently Renault sells ~ 0.3mn cars in
FUNDAMENTAL ANALYST
Brazil.
Nisha Sankhala
nishaben.shankhala@hdfcsec.com

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 PICK OF THE WEEK
SUBROS Ltd. Dec 18, 2017

Well poised to ride the PV recovery

KEY HIGHLIGHTS
With general slowdown in the economy and higher Inflation, Indian PV has experienced almost no growth
kind of situation between FY11-14 but since last 3 years the PV sales has grown at quite a significant rate.
 Subros ‘s main product base Last year the sales of Passenger Vehicles grew by 9.2% YoY and within PV, Passenger Cars, Utility Vehicles,
includes compressors, and Vans grew by 3.8%, 29.9% and 2.3%.
condensers, heat exchangers
and all connecting elements
We believe Indian PV sales will grow above 10% CAGR over the next 5 years. We expect strong sales of
required to complete AC loop.
newly launched models Baleno, Brezza, Ignis (Maruti), Kwid (Renault), KUV 100 (M&M) and new launches
 Subros cater to most segments in coming months to continue to drive growth for PV incumbents in FY18. Major launches are expected in
viz. PV, buses, trucks, the form of Hexa, Kite and Nexon by Tata Motors and refreshes of Swift and Baleno.
refrigeration transport, off-
roaders and railways. Their
main clientele include: Maruti, Market leader in the Indian auto air-conditioning segment, with 35% market share in automotive AC,
TAMO, M&M, Force, Ashok Subros is well poised to ride the growth.
Leyland, Nissan, Indian
railways etc.

 We expect Subros to clock

revenue CAGR of 17% over Volume Started Picking UP
FY17-20E aided by a recovery in
the PV industry and strong (in mn)
growth in other key segments
into bus/truck, railway, home
AC, radiators and Condenser
segments. Indian PV sale is
expected to
 Subros’ margins are expected to grow at 10%
improve owing to increased
localization and operating
CAGR over next
leverage. We also expect the 5 years
company’s interest costs to
recede, given the reduction in
the debt levels.

 We Recommend Subros BUY at

CMP of Rs. 264 and add on
decline of Rs. 245 for the target
of Rs. 318 in the time frame of 4 Source: Company, HDFC sec Research
Quarters.

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 PICK OF THE WEEK
SUBROS Ltd. Dec 18, 2017

Entry into untapped areas, opening up larger opportunities

The Company’s entry into bus/truck AC, transport refrigeration (cold chain) and railway offers large
incremental opportunities, which will in-turn, contribute to meaningful revenue over the next 3-5 years.

Preference for AC buses is rising: Rising urbanization and growing infrastructure is creating a big
market for buses. AC buses are no longer looked upon as costly alternatives compared to conventional non-
AC buses. Travellers are ready to pay for comfort and state transport undertakings and city bus
undertakings are warming up to the prospect of AC buses in their fleet. Schools and colleges away from
the city are seeing an exponential rise in the number of new extensions, and the demand for high-end AC
school buses is growing rapidly.

Mandatory AC cabin for trucks: As per the notification from the Ministry of State for Road Transport,
ACs or blowers are mandatory in trucks from Jan-18. As per management, total market opportunity from
this (assuming 50:50 AC and blower volume) would be Rs. 1.75bn.

Refrigerated vehicles-Growing segment: Company provides a complete range of transport refrigeration

solutions suitable for storage volume of upto 50 cu.m. The company is currently sourcing the chassis of the
Super Ace LCV from Tata Motors, fitting the refrigerated container on it and supplying it back to the OEM.
The company has also tied up with Ashok Leyland for Dost and M&M for Bolero. The company expects
revenue size of this business to increase to Rs 400mn in the next two years. This segment has slightly
better margins (12-13%) vs. the existing business.

Railways: Subros has made entry in Indian Railways with development of import substitute for driver cabin
AC for diesel locomotives. Currently, the Company has two order for ~Rs250mn from Diesel Locomotive
Works (DLW), Varanasi. And recently also company won order worth Rs100mn from Indian railway. The
company expects more such regular orders to flow in from the Indian Railways.

Maruti’s new plant in Gujarat

In Q4FY17, company commenced supplies of ACs for the Maruti Suzuki Baleno in the Gujarat plant from its
Sanand plant. Realizing the business potential the company is also looking to set up second new
manufacturing facility there by 2HFY19. Overall capacity utilization has reached to 90%.

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 PICK OF THE WEEK
SUBROS Ltd. Dec 18, 2017

New Business has strong potential

Radiator business: The Company is supplying radiators to Maruti through Denso. Capex for Radiator
segment was Rs 250mn in FY16 and management has indicated additional Rs 350mn capex for additional
capacity. Management also expects revenue of Rs 2bn in FY18E (Rs 1bn was in 1H).

Home AC segment: Subros is getting into new segment of Home AC via application development of heat
exchangers for this segment. They are in discussions with major lead manufacturers of home ACs for
exploring business opportunities and are in advance stages of product development & approvals to
commence supplies with some of them.

View & Valuation:

Post the fire accident at their Manesar plant, the company had filed Insurance for Rs. 3700 Mn out of which
Rs. 1630Mn has been claimed and the rest will get passed based on total reinstatement costs. Profitability
of Subros in FY17 impacted by extra-ordinary expenditure (Rs 243mn) pertaining to re-instatement of
facilities
We expect Subros to clock revenue CAGR of 17% over FY17-20E aided by a recovery in the PV industry
and strong growth in other key segments into bus/truck, railway, home AC, radiators (supply to Denso)
and Condenser (supply to Whirlpool) segments. Also, margins are expected to improve owing to increased
localization and operating leverage. We also expect the company’s interest costs to recede, given the
reduction in the debt levels. We forecast 49% PAT CAGR over FY17-20E. The stock is trading at 19.6x/14x
of FY19E/FY20E EPS.
We recommend Subros as BUY at CMP of Rs. 264 and add on declines of Rs. 245 for the target of Rs. 318
in the time frame of 4 Quarters.

Risk & Concerns:

 Slowdown in economy
 Volatility in raw material prices
 Highly dependent on few Customers
 Currency Fluctuations
 Cv ac/blower regulation was delayed once from 1st April 2017 to 1st Jan 2018, so it can be
delayed further.

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 PICK OF THE WEEK
SUBROS Ltd. Dec 18, 2017

18% CAGR Over FY17-20E Operational Efficiencies to bring down Expenses

Source: Company, HDFC sec Research Source: Company, HDFC sec Research

Reducing Debt And Interest Cost

Improvement In Return Ratios From FY18

Source: Company, HDFC sec Research

Source: Company, HDFC sec Research

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 PICK OF THE WEEK
SUBROS Ltd. Dec 18, 2017

Subros Auto AC Capacity Utilization On Uptrend Revenue Break-up

Source: Company, HDFC sec Research

Source: Company, HDFC sec Research

Falling Share of Revenue From PV Segment Increasing Revenue Base of New Verticals

Source: Company, HDFC sec Research Source: Company, HDFC sec Research

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 PICK OF THE WEEK
SUBROS Ltd. Dec 18, 2017

Balance Sheet
Income Statement (Rs mn) " FY16 FY17 FY18E FY19E FY20E
(Rs mn) " FY16 FY17 FY18E FY19E FY20E SOURCES OF FUNDS
Net Revenues 13,069 15,495 18,744 21,855 24,810 Share Capital - Equity 120 120 120 120 120
Growth (%) 9.2 18.6 21 16.6 13.5
Reserves 3,234 3,338 3,745 4,353 5,195
Material Expenses 8,840 10,709 12,840 14,796 16,722
Total Shareholders’ Funds 3,354 3,458 3,865 4,473 5,315
Power & Fuel expenses 237 - 319 372 447
Long Term Debt 2,898 2,669 2,469 1,969 1,469
Employee Expenses 1,262 1,539 1,743 2,120 2,332
Short Term Debt 1,083 1,707 1,720 1,660 1,600
Other Operating Expenses 1,208 1,577 1,734 2,032 2,334
Total Debt 3,980 4,376 4,189 3,629 3,069
EBITDA 1,521 1,671 2,109 2,536 2,975
Net Deferred Taxes 295 246 211 215 220
EBITDA Margin (%) 11.6 10.8 11.2 11.6 12
Long Term Provisions & Others 102 93 93 93 93
EBITDA Growth (%) 11.2 9.8 26.2 20.3 17.3
TOTAL SOURCES OF FUNDS 7,731 8,172 8,358 8,409 8,696
Depreciation 864 879 1,026 1,098 1,170
APPLICATION OF FUNDS
EBIT 657 791 1,083 1,438 1,806
Net Block 5,740 6,263 5,997 5,899 5,729
Other Income (Incl. EO Items) 24 -277 45 48 52
Interest 417 422 431 377 319 CWIP 449 200 222 200 180

PBT 264 92 697 1,109 1,539 LT Loans & Advances 466 587 504 504 504

Tax (Incl. Deferred) 24 -49 153 299 415 Total Non-current Assets 6,680 7,075 6,748 6,628 6,438

RPAT 240 141 543 810 1,123 Inventories 1,766 2,052 2,157 2,515 2,923

EO (Loss)/Profit (Net of Tax) - -200 - - Debtors 986 1,302 1,181 1,377 1,699

APAT 240 341 543 810 1,123 Other Current Assets 507 984 1,088 1,232 1,343

APAT Growth (%) 18.1 42.1 59.3 49 38.7 Cash & Equivalents 70 83 286 302 399
Adjusted EPS (Rs) 4 5.7 9.1 13.5 18.7 Total Current Assets 3,328 4,421 4,712 5,426 6,364
EPS Growth (%) 18.1 42.1 59.3 49 38.7 Creditors 1,293 1,786 1,789 2,115 2,369
Source: Company, HDFC sec Research
Other Current Liabilities &Provns 985 1,539 1,312 1,530 1,737

Total Current Liabilities 2,278 3,324 3,101 3,644 4,106

Net Current Assets 1,050 1,097 1,611 1,782 2,258

TOTAL APPLICATION OF FUNDS 7,731 8,172 8,358 8,409 8,696

Source: Company, HDFC sec Research

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 PICK OF THE WEEK
SUBROS Ltd. Dec 18, 2017

Key Ratios
Key Ratios
(Rs mn) " FY16 FY17 FY18E FY19E FY20E
(Rs mn) " FY16 FY17 FY18E FY19E FY20E
Reported PBT 264 92 697 1,109 1,539
PROFITABILITY (%)
Interest expenses 417 422 431 377 319
GPM 32.4 30.9 31.5 32.3 32.6
Depreciation 864 879 1,026 1,098 1,170
EBITDA Margin 11.6 10.8 11.2 11.6 12
Working Capital Change 17 -123 -105 -155 -380
APAT Margin 1.8 2.2 2.9 3.7 4.5
Tax Paid (57) - (188) (295) (411)
RoE 7.4 10 14.8 19.4 22.9
Other operating Items - -
OPERATING CASH FLOW ( a ) 1,505 1,271 1,860 2,134 2,236 RoCE 8 8.8 10.6 12.9 15.9

Capex (751) (1,153) (781) (978) (980) EFFICIENCY

Free cash flow (FCF) 755 118 1,079 1,156 1,256 Inventory (days) 49.3 48.3 42 42 43
Non-operating Income - - - - Debtors (days) 27.5 30.7 23 23 25
INVESTING CASH FLOW ( b ) (751) (1,153) (781) (978) (980) Payables (days) 36.1 42.1 34.8 35.3 34.9
Debt Issuance/(Repaid) (288) 395 (187) (560 (560) Cash Conversion Cycle (days) 27.4 23.9 25.8 24.7 27.4
Interest Expenses (417) (422) (431) (377) (319) Debt/EBITDA (x) 2.6 2.6 2 1.4 1
FCFE 49 91 461 219 377 Net D/E (x) 1.2 1.2 1 0.7 0.5
Share Capital Issuance - - Interest Coverage (x) 1.6 1.9 2.5 3.8 5.7
Dividend (48) (78) (136) (202) (281) PER SHARE DATA (Rs)
FINANCING CASH FLOW ( c ) (753) (105) (877) (1,140) (1,160) EPS 4 5.7 9.1 13.5 18.7
NET CASH FLOW (a+b+c) 1 13 202 16 97 Dividend 1.6 1.3 2.3 3.4 4.7
EO Items, Others 69 70 83 285 302 Book Value 55.9 57.6 64.4 74.6 88.6
Closing Cash & Equivalents 70 83 285 302 398 VALUATION
Source: Company, HDFC sec Research
P/E (x) 66 46.3 29 19.6 14.1
P/BV (x) 4.7 4.6 4.1 3.5 3
EV/EBITDA (x) 13.1 12.1 9.4 7.6 6.3
EV/Revenues (x) 1.5 1.3 1.1 0.9 0.8
Dividend Yield (%) 0.6 0.5 0.9 1.3 1.8
Source: Company, HDFC sec Research

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 PICK OF THE WEEK
SUBROS Ltd. Dec 18, 2017

Rating Chart

R HIGH
E
T
U MEDIUM
R
N LOW
LOW MEDIUM HIGH
RISK

Ratings Explanation:

RATING Risk - Return BEAR CASE BASE CASE BULL CASE

IF RISKS MANIFEST
IF INVESTMENT
PRICE CAN FALL 15%
IF RISKS MANIFEST RATIONALE
LOW RISK - LOW & IF INVESTMENT
BLUE PRICE CAN FALL FRUCTFIES PRICE
RETURN STOCKS RATIONALE
20% OR MORE CAN RISE BY 20% OR
FRUCTFIES PRICE
MORE
CAN RISE BY 15%
IF RISKS MANIFEST
IF INVESTMENT
PRICE CAN FALL 20%
MEDIUM RISK - IF RISKS MANIFEST RATIONALE
& IF INVESTMENT
YELLOW HIGH RETURN PRICE CAN FALL FRUCTFIES PRICE
RATIONALE
STOCKS 35% OR MORE CAN RISE BY 35% OR
FRUCTFIES PRICE
MORE
CAN RISE BY 30%
IF RISKS MANIFEST
IF INVESTMENT
PRICE CAN FALL 30%
IF RISKS MANIFEST RATIONALE
HIGH RISK - HIGH & IF INVESTMENT
RED PRICE CAN FALL FRUCTFIES PRICE
RETURN STOCKS RATIONALE
50% OR MORE CAN RISE BY 50%
FRUCTFIES PRICE
OR MORE
CAN RISE BY 30%

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 PICK OF THE WEEK
SUBROS Ltd. Dec 18, 2017

Closing Price
300
280
260
240
220
200
180
160
140
120

Rating Definition:

Buy: Stock is expected to gain by 10% or more in the next 1 Year.

Sell: Stock is expected to decline by 10% or more in the next 1 Year.

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 PICK OF THE WEEK
SUBROS Ltd. Dec 18, 2017

Disclosure:
I, Nisha Sankhala, MBA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has
no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or
view(s) in this report.
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ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its
associate does not have any material conflict of interest.
Any holding in stock –NO
HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475.

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