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Subros 3QFY2012 performance highlights and results update

Contributed by Angel Broking

Subros (SUBR) reported weak results for 3QFY2012, led by a yoy decline in its volumes and higher interest expense. However, sequentially, higher interest cost and depreciation expense impacted the company’s performance. We expect passenger car demand to improve in FY2013E, led by the likely easing of interest rates, thereby benefitting SUBR. We recommend Accumulate on the stock.

Drop in volumes and higher interest expense impact results: SUBR reported a 7.1% yoy decline in its net sales to Rs.253.8cr, primarily due to a 13% yoy decline in volumes. Lower volumes can be attributed to the slowdown in the passenger car industry and production constraints witnessed by one of the company’s major clients, Maruti Suzuki. Net average realization, however, improved by 6.7% yoy (down 3.4% qoq), thereby preventing further decline in the top line. On a sequential basis though, net sales increased by 5.5% on account of a 9.1% increase in volumes. Operating margin improved by 107bp yoy (62bp qoq) to 8.5%, driven by raw-material cost savings (raw-material to sales ratio declined by 381bp yoy) due to commencement of local production of certain components (mainly evaporators). However, a 266bp yoy increase in staff cost restricted further margin expansion to a certain extent. Net profit fell sharply by 62.5% yoy (33.7% qoq) to Rs.2.1cr on account of an 88.1% yoy (21.3% qoq) increase in interest cost.

Outlook and valuation: We expect revival in the company’s volumes in FY2013E, led by improvement in demand for passenger cars with the likely easing of interest rates. Further, we expect margins to remain stable, led by localization benefits. Thus, we recommend Accumulate on the stock with a target price of Rs.28, valuing SUBR at 6x FY2013E earnings.