Stock Market Result Update on Subros for 1QFY2012

Stock Market Result Update on Subros for 1QFY2012 with an Accumulate recommendation and a Target Price of `36 (12 months).

For 1QFY2012, Subros reported a mixed performance. The company’ s top line reported modest 7.8% yoy growth because of higher average net realisation, whereas operating margin improved due to lower raw-material costs, which was led by local production of evaporators. We maintain Accumulate on the stock.

Top-line growth driven by higher realisation: Subros reported modest 7.8% yoy (down 16.9% qoq) growth in its net sales to `252cr for 1QFY2012. Top-line growth was driven by 7.3% yoy (3.2% qoq) growth in average net realisation, as volumes remained flat. Realisation improved due to price hikes and change in product mix. On a sequential basis, volumes declined steeply by 19.5%, in-line with the volume decline in the passenger car industry. Operating margin registered an 84bp yoy (99bp qoq) expansion on account of a 393bp yoy fall in raw-material cost. Local production of evaporators as an import substitute also resulted in cost reduction to a certain extent. However, other expenditure increased by 221bp yoy, restricting further margin improvement. As a result, net profit grew by 12.5% yoy (down 26.9% qoq) to `8cr. The significant increase in interest cost (up 61.6% yoy to `6cr), however, arrested further bottom-line growth.

Outlook and valuation: We estimate Subros to register a CAGR of 8% in volumes over FY2011–13E, leading to a ~10% CAGR in revenue. We expect the company’s margin to improve marginally on account of localisation of products such as evaporators and heater core. However, bottom-line growth will be restricted due to increased interest cost. At `34, the stock is trading at 6.8x FY2012E and 6.4x FY2013E earnings. We maintain Accumulate on the stock with a target price of `36.