Friday, August 28, 2009




Subros, the market leader in auto air conditioning business, is benefiting from revival in the volumes of its key customers Maruti Suzuki India (Maruti), Tata Motors and Mahindra & Mahindra (M&M).

Due to its market leadership Subros also has exclusive supply contracts for some of the latest launched products such as Maruti’s A-Star and Ritz and M&M’s Xylo. The company will also start supplying air conditioners to Tata Motors’ Nano from January 2010.

In a recent interaction, the company’s management indicated that it is planning to revive its capital expenditure (capex) plans and enhance its manufacturing capacity from 0.75 million units to 1 million units by the end of the current financial year. It would incur capex of around Rs70 crore over the next two years.

Given the improvement in demand environment and lower base of FY2009, we expect the company to report a stellar compounded annual growth rate (CAGR) of 38.2% in the net profit for FY2009-2011. Apart from double-digit volume growth, the earnings growth would also be aided by lower interest outgo. Consequently, we have revised our estimates sharply upwards for FY2010 and FY2011 by 12.5% and 40% to Rs3 and Rs4.2 respectively.

At the current market price the stock is trading at 8.3x its FY2011E earnings and enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) of 3.2x. We maintain Buy recommendation on the stock with revised price target of Rs42.


Bond yields inching up

Key highlights

The government of India (GoI)’s borrowing program and surge in supply of corporate papers have led to firming up of bond yields, with the yield curve shifting upwards in August 2009 vis-à-vis that in July 2009.

Our impact analysis suggests that public sector banks are relatively more exposed to marked to market (MTM) losses than private players (as has traditionally been the case). This will have potential impact at the profit before tax (PBT) level of the banks in a wide range (of
2% to 9%). Union Bank, Bank of India and State Bank of India among our coverage are likely to be worst affected in the form of MTM losses.

To see full report: SUBROS