Buy This Small Cap Auto Ancillaries Sector Stock For 32% Potential Returns: Emkay Research

Stock Outlook & Returns

Friday, 23 September, the Suprajit' stock closed at Rs 337.10 apiece. The stock's 52 week low is Rs 272.05 apiece and the 52 week high is Rs 474.90 apiece, respectively.

Over the week, the stock gained roughly 0.28%, whereas, in the past 1 month, it gained 2.56%. In the past 1 year, the stock gained 7.03%. In the past 3 & 5 years, the stock gave 87.38% and 22.34% positive returns, respectively.

Consistent out-performance of 5-10pps over industry volume growth

Suprajit's Auto Cable segment saw 9% revenue CAGR in FY16-22 vs. flat volumes for the underlying industry driven by market-share gains of 1- 3% annually across the auto/non-auto segments. We expect Auto-Cable outperformance to endure, with 12% revenue CAGR over FY23E-28E vs. 6% volume CAGR for the underlying industry.

Resilient performer through cycles

During the past two down-cycles (FY07-09, FY19-21), Suprajit's revenue growth was positive, thanks to: (1) the company increasing its wallet share; and (2) its diversified revenue base (healthy exposure to the aftermarket segment). The RoE, too, was healthy, at over 15%.

Auto cables (59% of revenue) to outperform, buoyed by wallet-share gains

The brokerage said, "We forecast the segment to register 29% CAGR over FY22-25E (organic revenue CAGR of 13%), led by i) upcycle in the underlying industry (8% volume CAGR); ii) increased CPV, driven by new products/premiumization; iii) market-share gains on account of competitive pricing; and iv) Kongsberg's LDC (LDC) acquisition (~Rs5.5bn revenue accretion). CPV improvement is likely to be driven by new-product forays, such as digital speedometers, electronic throttles, actuators and allied cable products. This should more than offset the CPV reduction because of transition to electric vehicles (EVs)."

Non-auto cables (23% of revenue) to see a beat, boosted by entry in new industrial segments

The brokerage said, "We forecast 24% revenue CAGR over FY22-25E (organic CAGR of 14%), led by: 1) upcycle in the overseas industrial segment - outdoor power equipment (8%); 2) market-share gains in new segments such as agriculture, construction, power sports vehicles, and medical; and 3) the LDC acquisition (Rs1.1bn revenue accretion)."

Lamps segment (19% of revenue) supported by industry consolidation

The brokerage said, "We forecast the segment to post a 9% revenue CAGR over FY22-25E, aided by the upcycle in the underlying industry (7%) and a higher wallet share in the halogen lamps segment, owing to Industry consolidation. We expect market-share gains to offset the CPV loss, which was due to industry shift towards LED lamps."

Initiate coverage with BUY

Emkay Research said, "We initiate coverage on Suprajit with a BUY recommendation, and Sep-23E TP of Rs440/share, based on DCF methodology which implies a 20x forward P/E. Our target multiple is broadly in line with the company's 10-year average P/E. Suprajit is attractively valued on ROE-adjusted PEG at 0.6x and scores above the competition (average at 1.5x)."

Disclaimer

The stock has been picked from the brokerage report of Emkay Research. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.