Suprajit Engineering

Main Products Main Customer Industries
Control Cables, Speedometer Cables, Speedometers etc for 2 wheeler and 4 wheeler industry 60-70 % Sales from 2 Wheeler Indutries, 30-40 % from 4 wheeler, Main Customers : Tata, TVS, Bajaj, Mahindra, Ford, Hero Honda
Automotive Cables, Non-automotive cables, instruments Trying to get footprint in Non-Auto Markets for Cables like Material Handling, Earth Moving, Washing Machines, Golf Carts, Marine Applications
Bullish Viewpoints Bearish Viewpoints
Largest automotive cable manufacturer in India having a capacity of 6 crore cables Declining 2 wheeler industry and large expsoure to 2 wheeler industry
SEL enjoys over 60% market share in the two-wheeler automotive cables segment for OEMs Exports not performing well - exposure to European market from subsidiary Gill not doing well
Currently sole supplier to TVS, 90% of Bajaj motorcycles & 65% of Hero Honda requirements International price competition from Chinese products
Strong Management intent to grow. Company has virtually eliminated competition in last 15 years in 2-wheeler segment Havenât been able to make any significant footprints in non-auto market in the last few years despite efforts
Increasing presence in 4 wheelers - customers include Tata Motors, Mahindra & Mahindra, Hyundai, Ford and General Motors- It Outbid 5 competitors for Tata Nano Cable supply
Export customers include General Motors in US
Barriers to Entry Interesting Viewpoints
Strong Customer Relationships - virtual customer lock-ins in 2-wheeler industry Huge untapped Non-Automotive Cables market
Location - Suprajit has set up capacity at 6 different locations across the country to be close to its main customers in the North, West and Southern belts High-Margin replacement market currently estimated at 200 Cr; Suprajit currently gets only 5% of revenues from this; has set up a 100 strong dealer network to tap this segment

Export non-performance is linked to recession in automobile export markets; as and when these markets start recovering export performance may provide the filip to growth
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Hi,

I am trying to meet up with Suprajit Management in order to try and understand this company and its prospects better. Enclosed is a set of questions drafted for the same. Please help refine the question set. This is a Bangalore based company. Anyone in Bangalore interested to join me for the factory visit and Management interaction, welcome.

Rgds,

Donald

Questions for Suprajit Management

1). We are impressed by Suprajitâs track record and especially the turnaround post FY2008. Going by 9month results FY10 looks to be a stellar year. Congratulations!

You had once talked of Suprajitâs vision of a Rs. 1000 Cr in annual sales. Thatâs about 4x current size. What are the important milestones on that journey? Where will that kind of growth come from, considering you practically dominate the 2-wheeler cables industry. How easy or difficult is it to scale up a high-volume, low-value (per unit) business?

2). The 2-wheeler cables segment is still some 60% of Sales. Your biggest customers still contributes some 18-20% of Sales.

These are some factors that constraint rating agencies like ICRA from assigning higher ratings to Suprajit. Whatâs the Management view on this? Is it business as usual or are there risk mitigation measures underway?

3). You are the sole suppliers to TVS group, the sole suppliers to Tata Nano, and now the John Deere relationship. You are close to those levels for atleast Hero Honda and Bajaj Auto.

Whatâs the secret? There must be a deliberate strategy you persue to get there, however there must be solid sustainable competitive advantages that allow you to remain entrenched in these relationships. Please elaborate how and why??

4). The Replacement market for automotive cables in India is estimated at over 400 Cr. However contribution from this segment for Suprajit was around 5% in FY09. This was mentioned as a focus area â a 100 strong dealer network was reportedly being put in place.

What has been the progress?? Whatâs the ratio of OEM to Replacement Sales? Please give us an idea of the margin contribution involved in OEM/Replacement sales

5). Gill Cables âthe UK Subsidiary front-ending Export Sales and high-value specialist cables & Suprajit Automotive at the Back-end handles large-volume low-value work. Unlike FY09, your 9mFY10 consolidated revenues would indicate that the subsidiaries have started adding to the bottomline.

Automobile segment in Export markets reportedly have not revived. So is this the Gill-Suprajit Automotive low-volume/high-volume mix that is working here? How are the margins here â doesnât the additional freight cost incurred impact margins?

Other than General Motors, who are your major export clients? What can we expect in FY11? Will we see a higher contribution from Export Sales (from current 25%) here on?

6). Non-Automotive Cables 100% EOU unit.

Whatâs the installed capacity and current utilisation? Apart from John Deere who are the current customers and what are the order sizes? Whatâs the outlook on this segment? Is this already a significant contributor to top and bottomline. Whatâs the competition like? Is there no domestic market for non-automotive cables??

7). You won the Rs.40 Cr. Tata Nano cables contract. Then Singur factory had to be shifted to Sanand.

Tell us more on this contract and Tata relationship. What has it meant for the company? The margins must be pretty thin, and everyone is banking to make it up on huge volumes. What are the dimensions here, what timeframes??

8). In the 4-wheeler segment you count Tata Motors, Mahindra, Hyundai, Ford and General Motors as customers. Suprajit dominates the 2-wheeler segment, but in 4-wheelers itâs up against stiff competition.

Can you give us a sense of how are you competitively placed currently. How different is this competitive space vis–vis 2 wheelers and what are the main competitive elements? What role does technology play and what are you doing about it? Who is your strongest competitor? What kind of market shares are you aiming for here, by when?

9). Chinese and other Eastern Markets/Competition. The low capex costs and low automation costs for cable manufacturing are possibly not unique to India.

There were some reports earlier on tie-ups with Chinese and/or Korean companies, even a plant in China? Whatâs the Management view on Chinese/Korean cable manufacturers â allies or competition? How significant is the threat in domestic markets in future? And how strong are these in Export markets and your strategies for countering them??

10). Control Cables, Speedo Cables and Speedometers currently comprise Suprajit product mix. Currently roughly 80% of production is of control cables, some 18% is speedo cables, and the rest are speedometers.

We noticed an interesting trend over last 5 years. While per unit realizations of speedometers and to some extent speedo cables show an upward trend, control cable per unit realizations have come down quite a bit from a high of Rs.30 in FY 2007 down to Rs.21 in FY 2009? Would like to be educated on this and other such segment peculiarities.

11). There are trends of increased usage of electronics to replace traditional control and power transmission cables. Even sppedometers are going the digital LCD panels way

How do you view these trends and how serious are they, especially for the 2-wheelers segement

12). FY10 4th qr results were good. 47% sales growth and 53% PAT growth.

What were the growth drivers? Will these be sustainable? Many auto-ancilliary majors have actually doubled (and more) Sales & Profits in last Qr âwhy has Suprajit not been able to match them??

13). You have implemented oracle ERP across all locations, ISO/TS 16949 and other Quality control measures. You bought out control cables technology from Taiwan and improved on it over the years.

Tell us more on what makes Suprajit as it is today. What role has ERP played in real-time information flow, productivity and cost control measures? What are the biggest differentiators today for Suprajit? Why will your competitive advantage be sustainable??

14). Operating Cash Flow was rs. 33 Cr in FY09. Free Cash flows at 26 Cr was some 11% of sales in FY09, up from some 1.26% in FY08.

Setting up a new plant cost between Rs. 7-10 cr. With Operating Cash flows rising steadily does this meanSuprajit has reached a point of critical mass where it can keep funding future capex requirements out of internal accruals and still show healthy free cash flows?what about FY10?Is this level of free cash flow sustainable in the future?

15). Finally, one question many retail investors want to know. Why is Suprajit in âTâ group? What exactly happened?? Can the company do something about restoring status ante?

How does the Management view this relegation? Usually stocks when relegated to T group have suffered in performance â Is there a material impact on Suprajit shares performance?

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We had a very fruitful discussion with Company Secretary and Senior GM Mr. Medappa Gowda on Monday 7th June. The discussion is summarised as below.

Main Products

Control Cables, Speedometer Cables, Speedometers etc for 2 wheeler and 4 wheeler industry; Automotive Cables, Non-automotive cables, instruments

Main Customer industries

60-70 % Sales from 2 Wheeler Indutries, 30-40 % from 4 wheeler, Main Customers : TVS, Bajaj, Hero Honda, M&M, General Motors, Suzuki, Piaggio, Tata; Made an effective entry into non-automotive markets for farm equipments through John Deere relationship

Bullish Arguments

  • Largest automotive cable manufacturer in India having a capacity of 8.5 crore cables -spread over 10 strategically (close to major customers) located plants

  • Enjoys over 60% market share in the two-wheeler automotive cables segment for OEMs

  • Currently sole supplier to TVS, 80% of Bajaj motorcycles & 80% of Hero Honda requirements

  • Increasing presence in 4 wheelers - customers include Tata Motors, Mahindra & Mahindra, Hyundai, Ford and General Motors )- It outbid 5 competitors for Rs.40 cr Tata Nano cables supply for which it is the sole supplier

  • Major export customers include General Motors in US, Suzuki in Hungary, Piaggio

  • Sole supplier to John Deere, the worlds leading manufacturer of farm equipment -the 100% EOU unit for non-automotive cables caters to this customer & others

  • 7 yr i/tax and excise duty exemption for the recently completed Haridwar plant (catering mostly to Hero Honda’s requirements). 5yr i/tax holiday for the Pantnagar plant (catering to Bajaj Auto)

Bearish Arguments

  • Large exposure of over 60% to the 2-wheeler segment

  • Top 3 clients contribute over 50% of revenues

  • Export markets growth may be tempered by the slow revival of auto-markets in US & Europe

  • Raw material price volatility - Steel wires, steel, PVC, Brass, Alumunium & Copper

  • Increased use of electronics in 2-wheelers replacing traditional control & transmission products; even speedometers are giving way to digital LCD panels

  • significant competition in 4-wheelers, presence of MNCs

Barriers to entry

  • Strong Customer Relationships - virtual customer lock-ins in 2-wheeler industry

  • Successful in pursuing sole supplier strategy with multiple clients with its focus on cost & quality leadership -TVS, Tata Nano, John Deere for non-automotive cables

  • Location - Suprajit has set up capacity at 8 different locations across the country to be close to its main customers in the North, West and Southern belts

Interesting Viewpoints

  • Huge untapped Non Automotive Cables market

  • High-Margin replacement market estimated at 400 Cr; Suprajit currently gets only 6% of revenues from this; has set up a 200 strong dealer network to penetrate this segment

  • Despite the recession in automobile export markets, Suprajit management is quietly confident of a 50% growth in exports for FY11 - both from the automotive cables and non-automotive cables export markets

  • Raw material sourcing from China (mainly steel) -10-15% of requirement

  • MOU signed with a Chinese company for sub-assembly; not activated

Other Information

  • Mfg Plant Locations: Manesar (Haryana), Chakan (Maharashtra), Vapi (Gujarat), Pantnagar (Uttaranchal), Haridwar, Sanand, Dodaballapur, Bangalore

  • Oracle ERP implemented at all locations resulting in logistics, supply chain and production efficiencies; real-time MIS

  • Strong quality control processes - ISO/TS 16949/TPM/Kanban

  • Subsidiry: Gill UK -for high-end speciality cables manufacture & front-end sales for US & EU

  • 100% EOU -10 mn cables capacity -Suprajit Automotive Pvt Ltd - for export sales -approved by GM, Jaguar & Land Rover, Suzuki, Lear, Volkswagon, and many many others -contributes ~25% in Sales

  • 100% EOU- for non-automotive cables -contributing ~4% of Sales in FY10

  • Excess land available at most plant locations -on an average about 3-5 acres

Competitive Edge Sustainability arguments

  • Negligible competition in 2-wheeler segment

  • Strong quality & cost leadership augmented by close plant proximity to major clients - best margins & returns in the industry

  • Strong customer lock-ins; emerging as sole supplier status for major customers

  • Successful breakthrough in non-automotive market with John Deere sole supplier relationship

  • Strong Management poised to exploit untapped segments & markets -e.g. the focus on higher-margin replacement market which is estimated to be about 400 Cr annually. Currently only 6% of sales comes from replacement market

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They have not diluted their equity. They issued 1:1 bonus shares and a stock split 1:5 if I remember correctly. If you had 10 shares before, post the split you would end up owning 100 shares. Your ownership stake in the company remained as before, since everyone received the same proportion.

Split shares lead to more liquidity in outstanding shares and potentially make it more affordable to own and transact in the company’s shares. You may question the motive for sure as the stock was quoting at Rs. 159 or so, certainly not a very high price. Bonus shares just transfer part of the Reserves to Equity Capital.

Splits/Bonus do not lead to any changes in ownership but have been seen to effect sentiment positively, leading to a spurt in stock price subsequently. Has Suprajit stock gone up post split? yes it has from Rs. 15 to about Rs.17+

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http://www.valuepickr.com/resources

all you need to know on how to use screeners or create your own screens is here

This is another hidden gem that hasn’t got the attention it deserves - even in this forum:).Management is not keen on meeting analysts; couple of us invested in the stock have made company visits and interacted with the Company Secy.

Company has been posting good results - I am keen on interacting with the MD/Sr Management firsthand to get a better grip on how the company is strategically placed to exploit and drive future growth on the back of its seemingly water-tight grip on the automotive cables market.

But before we can reach there we will require us to dig deeper and come up with a list of questions for Management. I am inviting others to get interested in this story. Some recent highlights

  • On a consolidated basis 1HFy11 Sales 151.23 Cr up 45.75%. PBT at 20.31 cr up 51%. This is higher than the sectors growth of 29% in the same period. though there are others who have done better
  • The Management has communicated revising the budget for the whole year upwards based on the first half performance
  • Management expects non-automotive business (tractors John Deere) and after-market replacement market (200+ dealers) to grow at more than 50% for next 2 years
  • Cable capacity expansion to 110 mn is on track for completion by next year
  • new product development has seen gear-shift assemblies to one customer and supplies have started. other additional product development is in advanced stages
  • Production has reached full capacity at Hardwar
  • Ground breaking for new 4-wheeler cable plant at Chakan
  • operation commenced at newly aquired plant at Bangalore
  • Capacity expansion at 100% for EOU non-automotive cable plant

I truly believe this is one dark-horse that has the capacity to do singularly well. The focus is away from the stock and generally gets ignored in the auto-ancilliary pack which has more glamorous growers. This is also because the business has promised to strike out since the last 2 years but faltered!

We need to understand and dig more more? Where are the divers??

From a first look the company looks good based on its market share and the segments it caters to.

But with the ongoing market correction, this does not exactly look cheap if one were to compare this one with other more solid businesses. So although the company looks good, one will have to wait for the valuations to turn appealing.

I am trying to zero down on a few companies which have corrected a lot in the current meltdown and fundamentals dont seem to have changed much. Just to name a few, I am closely looking at ajanta pharma, aries agro, ilfs inv managers, and even some big companies like lic hf, idbi, idfc etc. LIC HF is currently at below 2 times the adjusted fy 11 BV of around 80-85. If it were to come to around 120-125, it could be really interesting.

Maybe we can start a thread where all the participants can put up their top 10 picks with a few lines of justification for buying them and the ideal entry price for their picks.

Hitesh, I am struggling to get 2-3 really good ideas where I can be very very confident of making 2x-3x my money in 2-3 years. The good businesses are not cheap enough (Supreme, Yes Bank, Shriram Transport Finance, Opto, Zydus etc) and the others have question marks in my mind. But I really love your idea of having a separate thread for the top 10 picks.

Donald, I might take some time (pretty busy with some work @ office), but I will get back with questions on Suprajit. Maybe sometime end of next week.

Suprajit Concall on Q3 results, Feb 03, 2010.

I took notes as best as I could. hopefully you guys will be able to make out. Anyone else who attended like Ayush, Gaurav please add/correct my hurried notes. (warning: I might have got figures wrong:))Edited initial post so it makes sense to most!

Management comments

Robust year 9m topline growth by 41-42% .auto sector growth is at 36-37%.

Grown better than industry -on the back of larger share ofbusiness, excellent growth in after-marketsegment, good growth in non-auto growth.

EBITDA margin fall by 1% …from a high base. Last year was one of our bets years. still one of the best in industry

Going forward revenue growth prospect is good. Jan has been good and same should continue.

Analyst Q&A

2 wheeler - 60-65% share

3 wheeler car & lcv/hcv - share along with 5 other -35% of OEM market

Entry barriers & how will you guard market share?

Customer looks forconsistent quality, deliver when they want, at a price they want

all 4 parameters are important.

if someone can providesuperior delivery, superior quality, superior price -customer will surely look at them.

we have something is 3.8% -best in industry. ouroperational efficiency and project management , driving down operational costs. We deliver on all fronts…difficult for someone to replicate.

Competition?

3 domestic -remson, acey engineering, madhusudan

tata ficosa, samyong, Infrac - they are in select select pockets, wheras Suprajit is everywhere (2/4 wheeeler, non-auto)

Customer typically has 2suppliers -Maruti has 3 suppliers. supply indirectly to a supplier

There’s been a slowdown for some mfrers? whats your view?

Suprajit has seen very robust Jan, and Feb looks better. We supply to almost all players.

non-automotive and after-market compensates any slowdown in industry growth

after-market is -12-13 cr in FY10, 25 Cr in FY11, and will do 50 Cr in FY12

Also Replacement market is bigger than the OEM market. we have spentsignificant money in last 4 years -distributor in every state, every district- will see good growth

non-automotive - added 2 more floors. 4x capacity. Soslowdown in industry possible

but slowdown in Suprajit - dont think so.

Where do you see EBIOTA margins sustainable at?

last year, in history of Suprajit, exceptional year, that is not sustainable

this years level is 17.5 - avg ebitda margin is 15%, operating at above that, and we will continue to do that .whether 16.5%, 17% or 18% difficult to tell, but surely above 15%

Raw materials?

40-50% of cables RM is steel; rubber, brass, alumunium, copper, zinc, PVC,plastics are others (rest are all 5-7%)

No of cables in a vehicle? realisations

typically no of cables 4-7 in a 2-wheeler. in a modern 4 wheeler 8-10 cables

Realisation per cable in last 2 years has gone up nearly 15% increase in last 2 years.

new generation products, new cables with a little value add, little extra, little higher realisation.so we will be able to manage better than others in the industry

?

20% will be good and optimistic

New capacities coming onstream?

EOU non-automotive - started with 1 floor -2 years ago -response has been very robust -added 2 new floors toincrease capacity-fully operational by May -june 2011

After-market :purchased a plant, where capacity is being added -bommasandra new unit -after market business growing robustly -is now taken care by 2 units-

Chakan -new plant by Sep-Oct

Sanand - going slow; currently supplying from Vapi (continue till we know volumes of nano)

110 million capacity will be ready in FY12

Keeping pace with growth By Hero Honda, Bajaj?

hero honda - supply full capacity from co-located (can manage incremental)

bajaj - supply full capacity - from co-located plant -over capacity in our plant by double

Non-automotive customers/break-up? business volume at full capacity

2% is non-automotive, John Deere for tractors, outdoor units, clubcar -lawn management, golf & lawn management

Kubota-tractor;

Full capacity ~60 cr a year, current FY11 is about 15 Cr; double 35-38cr next year

margins are higher in non-auto and replacement market

Subsidiary Gill performance?

Gill is operating as a tech centre -Dev, engineering, customer dev, only a small manufr -less than a million poundsof business is mfred in UK, because customer not interested in approving plant in India again

Consolidated numbers look better than standalone

75 mn to 110 milion capacity; left over capex is 20-25 Cr, will be completed by Dec FY11. Full benefit in FY12

Inorganic growth proposal? status?

Inorganic growth - proposal received got stuck at Valuations- should get same returns on business as we get by investing same in Suprajit- not here to do an acquisition for the sake of a acquisition

Growth?

2 wheeler growth -25-28%

others - non auto, after market, car sector -growing faster

New customers? status of relationship? Potential?

New customers - meritor a new customer, BMW in EU market from India (after knocking on their doors for 5 years), Nissan, Value from France, Volkswagon (Polo in India)

-all of these are initial orders, but great for business growth in next year and further

Exports growth - very exciting cuistiomers - miniscule order compared to overall BMW business, diffciult time of last 2 years over,now lot of new traction, we need to execute on these opportunities; getting BMW is a high for us, many of our customers we are sole supplier for a product,but they have several platforms; eg if GM has 200 cable part numbers we supply hardly 10. the potential from each of these business is simply huge.

This is start of the relationship, we will not be able to tap a much higher share overnight,but if we execute well the potential is simply huge just from the Automotive sector alone if we can tap global opportunities.

After-market progress?

after market player -south india 5 years back; now in every state a distributor -pan India

25cr this year is not even 5% of the replacement market- we have now 4 units for after-market - not able to supply the demand-

so we are on a very strong wicket in afetrmarket after spending money ^ effort in last 2 years

Margins sustainability?

15% plus margins is an excellent business; this si sustainable; we will be happy to grow at 30% every year, drop half a percentage a year!

Full capacity will get what volume business?

110 mn ~diffcult; I would say approx 450 Cr

BS, Debt, debtor days

current debt 54 cr is debt on books. 25 cr debt, and 30 cr working capital, debtor days 65

Effective tax rate?

tax holidays in Haridwar, others - 29% average tax vs 33% normal tax

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Thank you Donald.

I think the com has declared interim divided of 20 paise/share that is nearly 1% at CMP. Pls correct me if I got wrong. The stock has not corrected much in Dec or Jan. What is your view on the valuation?

Regards

Vinod

Yes Dividend Yield is 1% at CMP. record date for same is 17 Feb.

Suprajit’s business is a steady one. They look poised to do anywhere between 2.2 to 2.7 in EPS for FY11 (TTM is 2.3). A realistic call is more like 2.45 assuming a conservative 17.2% OPM for Q4.

That’s like availability at 8x PE which is great for a company currently growing revenues at 40% plus and EPS at 35%. This is a quality company with an excellent track record and good return ratios. Potential in my opinion is immense…One should take a 3-5 year view on this company.

Suggest anyone interested to pay close attention to what the Management is really saying on new customer acquisitions:)

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Donald,

Thanks for the summary. I couldn’t attend the con-call :frowning:

Regards,

Ayush

Donald,

Great Summary,

Missed on the Concall. I hope they continue with this practice going forward.

Their aftermarket sales segment seems to be going great guns and the. There are headwinds for the auto ancillary sector in terms of margins… but Suprajit has good execution record which the coming quarters should validate.

Gaurav

I picked up some more of Suprajit and plan to keep accumulating as it corrects every 10% or more. This is one of those few stocks where the growth story is intact and the quality of growth, profitability hasn’t been impacted.

On the other hand there are several stocks where the quality of growth and the growth itself has come under a cloud post a good 1Q.

Hi Donald,after the deep corrections where does it leavePondi, Mayur and Manjushree?

Hi, Ayush,

Had seen in your website that your status on Suprajit is ‘‘exited’’. Was it just profit booking?

Regards

Vinod

Hi Vinod,

Speaking for myself, I am a buyer in the stocks I am convinced of, where I find the story has remained intact and improved.

Mayur Uniquoters I have been buying on every dip. Today I bought more at 240 levels. This is <6x as 9m EPS is already 34.I will be buying more …watching out for lower levels

Manjushree at 56-57 is again at 5-6x FY11. Bought more at these levels…will buy more…hopefully at lower levels

In both stocks the story has remained intact or improved, as has Balaji Amines. have updated in respective threads

In Pondy Oxides the story has deteriorated …margins are disappointing, working cap requirements have been increasing. So unlike the first two, this is a counter which may find itself battered much more…should the market keep correcting. I am staying away!

Hi Donald,after leavePondi,

Hi,

Yeah, the status on Suprajit is correct and we had sold completely around 22-23 levels. Reason - we felt that slow down will be coming in auto sector and hence margins of autoancillarywill take hit. Its a very good company for long run and we plan to buy again at an opportunate time.

Regarding Pondy, yes the numbers haven’t been good and are below expectations. Market has already adjusted the price to 22-23 levels. Looking at the historical dividends by the company of about 10-12%…the stock is not that bad at these levels.

Regards,

Hi Guys,

I updated the Suprajit Engineering stock story finally, bringing in lot of details from the last Conference Call in February.

The result is awesome - I am doubly impressed again. This company is on the verge of very big things -certain to touch 400-450 Cr or even more in FY12. And in 3 years, we are staring at potentially bigger figures.

Please have a look. I will be preparing questions for Management starting tomorrow. Solicit help from anyone interested and tracking this bet.

Please contribute with your questions after going through this updated stock story.

I have been tracking Suprajit recently. They are building capacity and are expecting the results to improve in the next 2-3 years. However, I think that growth in the auto sector is likely to temper and that may severely impact the capacity utilization of Suprajit.

The question is whether the valuation already captures the growth prospects. I think not. And we may see some upsides in the short-to-medium term.

Note: I saw that S.P.Tulsian recommend Suprajit recently on CNBC.