Buy Subros; target of Rs 297: Dolat Capital Market

Dolat Capital Market's research report on Subros

Subros demonstrated strong earnings growth in Q2FY21 driven by pick up in the PV segment and cost control measures. EBITDA grew 21% YoY to Rs. 535mn with expanded margin at 11.7% (+280bpsYoY). Gross margin expanded (+180bps YoY) led by better product mix, increased localization and cost control measures The management is optimistic of a swift recovery in the PV and Home AC segment in 2HFY21. Despite the washout in 1H, the company expects the Home AC segment to see 15-20% growth in FY21. Current capacity for Home AC segment is 250-300k units and peak revenue may reach to Rs.2.5-3bn in next two years. Gross debt has come down to Rs. 1.4bn in Q2 vs 2.4bn in Q1 and management is targeting to reduce it further by Rs. 200-250 mn by year end. Major capex has already been incurred and the company is likely to generate strong FCF from H2FY21 onwards. We expect the company to be a key beneficiary of recovery in the PV segment and market share gain by MSIL owing to increasing preference for low-end entry-level cars. MSIL accounts for ~70% of revenue for Subros.

Outlook

Given the recovery in PV sales, incremental revenue from new business verticals (especially from Home AC), reduction in interest cost, and benefit from the lower corporate tax rate, we estimate Subros to potentially report a PAT CAGR of 16% over FY20-FY23E. We increase our EPS by 18/13% for FY22/23E and upgrade our target price to Rs 297 (based on 20x FY23E EPS). Maintain BUY.

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