Buy This Auto Ancillary Stock For Potential Upside Of More Than 29%: Emkay Global Financial

Emkay Global Financial, a leading India brokerage firm, has given a buy call on a small cap stock from auto ancillary. The brokerage firm is highly bullish on Suprajit Engineering and has given the stock a target price of Rs. 400.

The stock's price has been in the consolidation zone for the past few weeks, and the stock hasn't given a considerable upside or downside in recent trading sessions. However, the overall trend of the stock is an uptrend and has given a strong upside moment as a trend reversal from the previous downtrend.

Here is a detailed breakdown of the latest report of Emkay Global Financial on Suprajit Engineering.

Outlook of Suprajit Engineering

In 1985, Suprajit Engineering, promoted by Mr. Ajith Kumar Rai, began as a one-product supplier of cables to TVS Motor. With a growing revenue share from aftermarkets and exports, the company has established itself as the leading supplier of mechanical cables to the domestic 2W and passenger vehicle (PV) markets (market share of 65%).

Suprajit Engineering is a small market cap company with a capitalization of Rs. 4,708 Crores. The stock's current market price is Rs. 341, with an all-time high price of Rs. 478 and an all-time low price of Rs. 272.

Valuation Outlook of Suprajit Engineering

According to the latest report of Emkay Global Financial, "We forecast revenue CAGR of 25% over FY22-25E, driven by:
1) cyclical recovery in the underlying industry (8% medium-term volume CAGR).
2) market-share gains set to add 3pps outperformance vs. the industry, thanks to decentralized plant locations and competitive pricing owing to scale advantages.
3) growth in content per vehicle (CPV) led by new products (~Rs50,000/unit opportunity)."
Furthermore, "We forecast 28% EPS CAGR over FY22-25E for Suprajit, encouraged by the 25% revenue CAGR and 50bps EBITDA margin expansion. RoIy is likely to improve to 20% in FY25E from 15% in FY22. We estimate an average annual FCF generation of Rs2.2bn during FY24E/25E and expect the company's balance sheet to have net-cash of Rs2.1bn by FY25E vs. net-debt of Rs1bn in FY23E (post acquisition of LDC)." Said the latest Emkay Global Financial report.

Buy Call of Emkay Global Financial On Suprajit Engineering

As per the latest report of Emkay Global Financial, "We initiate coverage with a BUY recommendation and Sep-23E Target Price of Rs440, based on DCF methodology which implies a 20x forward P/E. Downside risks: Slower acceptance of new products (we have modelled-in 25% revenue CAGR through to FY28E), faster EV and LED penetration, and adverse commodity/currency price movement."
To summarize the report in the headline, the brokerage firm mentioned, "Dominance and swelling wallet share to drive outperformance; Initiate with BUY."

Can The Stock Price Move More Than the Target Price

"Historically, over FY16-22, annual market share gains have ranged over 1-3% across various segments, while our estimates factor in a lower range. Faster EV/LED penetration could also lead to quicker industry consolidation, which would drive much higher market share gains," said Emkay Global Financial in the report.