Recommendation: Buy
CMP = Rs 200 (as of Monday)
Price target: Rs 340
Result highlights:
- Subros' Q2FY2008 results were slightly below our expectations due to a lower than expected topline. The net sales for the quarter declined by 5.3% to Rs 157.1 crore on the back of a 4.1% decline in the volumes due to a slower offtake by Tata Motors.
- The operating profit margin (OPM) improved by 130 basis points to 12.3% in Q2FY2008 from 11% in Q2FY2007 due to higher efficiencies, savings in logistics costs and localisation benefits.
- Higher interest and depreciation charges led to a 17.4% decline in the net profits to Rs 6.4 crore. However, with majority of the capital expenditure (capex) incurred and with the low-cost debt recently raised by the company, we expect the interest costs to rationalise going forward.
- The sharp improvement in the OPM has been a positive surprise and we believe that the company would be able to maintain the OPM at these levels going forward. The company has already bagged an order from Suzuki to supply compressors for its new export vehicle, which would boost Subros' FY2009 volumes.
- At the current market price of Rs 200, the stock is available at very attractive valuations, discounting its FY2009E earnings by 4.9x and is available at enterprise value (EV)/earnings before interest, depreciation, tax, and amortisation (EBIDTA) of 2.6x.
- Hence, I maintain extremely positive stance on Subros with a price target of Rs 340.
