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Spark Capital - Suprajit Engineering: Quality name as a proxy to the domestic two wheeler theme




Spark Capital Advisors(India) Private Limited


03 Jul 2013





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Suprajit Engineering: Quality name as a proxy to the domestic two wheeler theme Businesses with technology barriers and businesses which enjoy inelastic demand and pricing power in the aftermarket have been the types we like within the auto parts space. Being the most cost efficient producer in a low tech product, is a third way to build a profitable franchise. With a return on capital employed in excess of 20% in all but 3 of the last 12 years, EBITDA margins consistently more than twice that of the nearest rival, and a rolling 3-year revenue and earnings CAGR exceeding 20% in 7 out of 10 periods starting FY01, we believe Suprajit is a an example of the third type and shares many similarities to Motherson Sumi’s domestic business. In our view, Suprajit is poised to maintain its dominant position in automotive cables, with market share gains with Honda (HMSI) being the near term growth trigger. We expect a revenue and earnings CAGR of 17% and 15% respectively in the next two years. Key Takeaways from management meet and plant visit: High profitability and dominant market share feed on each other: Suprajit’s economies of scale enable aggressive pricing and competitive sourcing from a large vendor base. Its competitors have not been as profitable and players such as Remsons and Acey who were first movers have ceded share. Profitability of these players have also been weak. Another competitor Tata Ficosa also has a chequered profitability track record and turned profitable in FY10. Market share with new customers to improve: The company is setting up a plant in Narsapuram, Karnataka for 100% supplies to the 1.2mn unit new capacity of HMSI. Management indicated that Suprajit’s pricing is lower than HMSI’s incumbent supplier and expects to gain substantial market share. The company is also expecting to scale up in newer accounts such as VW, Renault, Kubota and JCB. Aftermarket to be a growth driver: The aftermarket opportunity, although large in cables, is dominated by the unorganized segment. SEL has a market share of less than 10% in the automotive aftermarket segment against a 45% market share in the OEM segment. Management is looking to expand in this space and expects an annual growth of 25%. New products & acquisitions to drive increase in content: The company is trying to increase content by leveraging its customer relationships to sell products such as gear shifters, filters, stator coils and moulded assemblies. The management is also looking at acquiring component manufacturers for growth. We however, believe the risk of aggression is minimal based on its acquisition history. The company has been scouting for the right target since FY07.

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