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Subros: India’s largest auto air conditioning manufacturing company.

About Company
Subros was established in 1985 as a joint venture between the Suri Brothers, Denso Corporation, Japan and Suzuki Motor Corporation, Japan. The company has grown from a capacity of 15,000 AC units in 1985 comprising of largely an assembly operation, into the largest and only integrated manufacturing unit in India for Auto Air Conditioning systems. The company has the capability to manufacture compressors, condensers, heat exchangers and all the connecting elements that are required to complete the AC Loop.

Subros Ltd, incorporated as Subros Pvt Ltd in Feb.'85, was promoted by Ramesh Suri, Lalit Suri and Jayant Nanda. It turned into a public limited company in Oct.'85. It manufactures and supplies automotive air-conditioning systems (AAS) and fan motor assemblies with the technology developed by its collaborators, Denso Corp (13% stake) and Suzuki Motors (13% stake), both from Japan. Denso Corporation(formerly Nippon Denso) provides technical information to implement projects and to manufacture automotive air-conditioning systems including swash-plate type compressors, clutches and other associated components for cars and light commercial vehicles. In addition to providing advice in regard to the design, manufacturing and production problems it also trains technical personnel of Subras. Subros caters to the OEM segment with clients such as Maruti(for its 800cc, 1000cc and 1300cc models, Gypsy and it's latest Wagon R and Alto), TELCO and PAL. Subros signed a MoU with Allied Signal Environment Catalysts (ASEC), US, for a joint venture to produce catalysts to be used in catalytic convertors in vehicles using unleaded petrol.

 In 1994-95, it signed a sub-agreement with IDBI for grant in respect of production of Non-CFC Gas AC systems. During 1996-97, the quality management system of the company was awarded BS EN ISO 9002 certification from the Bureau Veritas Quality International. Subros has the reputation of launching A.C. Systems for the latest models hitting the market and it's keeping the tradition now also. The Company is always looking for indigenization of various components and development of modified A.C. System with latest technology for new model to be launched. Recently in 2000-01, it has undertaken conversion of conventional R-12 refrigerant based air conditioners to ecofriendly and non-ozone depleting R-134 refrigerant based A.C Systems for Maruthi's cars. Company has successfully commissioned a new plant at Noida.

The second phase of the expansion is in progress which is financed through internal accruals and partly by way of term loans from financial institutions. It has entered into new technical assistance agreement with the Collaborators, Denso Corporation, Japan for transfer of technology for designing and development of new AC system based on 10S model compressor and multiflow condensers. The company's various ongoing projects like Multi Flow Condensor, Pressure Die Casting and other import substitution projects are on stream as on 2000-01. The company has undertaken expansion cum modernization plan to increase the capacity from 3lakh A.C. Units to 5 Lakh A.C. Units per annun during the year 2002-03.
Further the company has initiated plan to set up its own design and development centre with the help of R&D Department and assistance from technical collaborators, Denso Corp. Japan and expects to complete it by end of this year. The company has also commenced commercial production of new generation 10S series compressor and started supplies to customers during the year 2002-03.

Reason to Invest in Subros:

 Healthy realization drives revenues: For Q1FY2012, Subros reported a total income of Rs253 crore, which is a growth of 8.1% year on year (YoY). The revenues were primarily boosted by a realization growth of 7.6% YoY. Volumes for the quarter at 196,364 units increased marginally by 0.5% YoY. The same were down 19.5% on a quarter on quarter (QoQ) basis on account of a volume decline to its major client Maruti Suzuki.

 Contribution margins continue to surprise positively; operating margins at 10.3%: The contribution margins expanded 480 basis points sequentially and 410 basis points YoY on account of a favorable product mix towards the bus segment and high-end models. Cost rationalization was evident as raw material / sales stood at 69.7%, which is the lowest in the last 11 quarters. However, staff cost / sales at 7.5% was the highest in the last 10 quarters and other expenses / sales at 12.6% was the highest ever. Consequently, the operating profit grew 21% YoY to Rs26 crore (above our expectations of Rs20.2 crore). 

 Higher interest cost lead to a lower PAT growth vis-?-vis EBITDA growth: A strong performance at the operating level was mitigated by a 62% YoY increase in the interest cost. However the tax rate was much lower than expected at 15.6% (on account of higher research & development [R&D] benefits). Consequently, the reported profit after tax (PAT) grew by 12.3% YoY to Rs8 crore. 

 Capex and capacity addition: For FY2011, Subros incurred a capital expenditure (capex) of Rs110 crore to increase its capacity from 0.8 million to 1.2 million units. For FY2012, the company plans to spend Rs100 crore, which will be primarily utilized towards green field capacity addition. To cater to the major original equipment manufacturer (OEM)s in southern India, the company plans to set up a new plant in Chennai, wherein land acquisition has already been done. But further plans are yet to be finalized. Moreover, the company’s Sanand plant will start production in Q2FY2012 to cater to Tata Motors.

  Higher localization to drive cost moderation: The company has spent Rs30 crore to develop a part ?RS Evaporator?, which was earlier imported. The efforts have reduced the raw material / sales ratio to 69.7%, which is the lowest in the last 11 quarters. It is also in the process of localizing another core part for the heater, which will further see moderation in raw material costs. The company expects localization levels at 60% for FY2012 from 50% in FY2011. The management has guided for a raw material / sales ratio in the range of 71-73% going forward.

 OEM demand to moderate; incremental growth to come from new clients: We expect the passenger car growth to moderate to 6-8% in FY2012. We estimate Subros to report a 7% volume growth in FY2012. We believe the volume growth will be achieved by adding new clients and through incremental volumes as we expect the core clients like Maruti Suzuki and Tata Motors to report a subdued volume growth in FY2012.

 Attractive valuation; maintain Buy: We believe that the company would further increase product localisation and reduce Yen denominated imports going forward. A higher localization would support margins in an inflationary scenario. Though we expect FY2012 margins to improve vis-?-vis FY2011, we believe the PAT growth will be lower than EBDITA growth on account of higher interest cost and depreciation. We maintain our FY2012 earning per share (EPS) at Rs5.2. However, we have reduced our FY2013 EPS estimate by 6.5% to Rs5.6 as we expect aggressive macro headwinds to impact volume growth of OEM clients going forward. We maintain our Buy recommendation with a revised target price of Rs39, discounting FY2013 estimates by 7x.