A vast replacement market (~28-32 bn lamps) versus SEL’s capacity (~110 mn) provides huge addressable market.

We reiterate ‘BUY’ on Suprajit Engineering (SEL) with a revised target multiple of 20x (earlier 15x; close to historical peak, but at 20{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446} discount to Motherson’s domestic business) and raise our FY22e EPS by 8{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446}. The revision factors in tailwinds including: (i) Order book postponement in export automotive cables (delayed model launches) can lead to sharp revenue surge in FY22/23; (ii) market share gain in Wescon driven by competitors’ weakness as well as SEL’s ability to ramp up production; (iii) success of the survival of the fittest strategy in Phoenix.

As a No. 3 player, SEL has leveraged its low-cost manufacturing to convert the top-2 players from competition to customers; Osram is a case in point. Besides, a vast replacement market (~28-32 bn lamps) versus SEL’s capacity (~110 mn) provides huge addressable market.

Resilient performance by subsidiaries: SEL’s consolidated revenue contracted ~51{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446} y-o-y (Rs 1.8 bn). Weakness in the domestic market (revenue fell ~65{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446}) was offset by relatively resilient performance of Wescon (revenue fall of 24{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446} y-o-y) and Phoenix (18{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446})–both of which gained market share. Consolidated gross margin improved 310bps q-o-q (to 44.4{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446}) due to improved product mix, benign commodity prices and cost cutting efforts.

Profitable market share to drive growth: Across each of the businesses we are enthused by SEL’s focus on gaining profitable market share. Using its low cost of operations as well as value-oriented product proposition, it continues to deepen penetration among existing customers even as new order wins sustain.

Outlook: Story intact—For FY20–22, we estimate consolidated EPS CAGR of ~10{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446}. Despite near-term weakness, we believe the franchise remains robust and well placed to leverage on revival. We maintain ‘BUY/SO’ with TP of Rs 219, valuing it at 20x March 2022e EPS. The stock is trading at a FY21/22 PER of 26.2x/16.5x.

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