Subros, the market leader in auto air-conditioning business with 42% market share, is likely to benefit from the stupendous volume growth of its key clients-Maruti Suzuki India (Maruti), Tata Motors and Mahindra & Mahindra (M&M).
Subros garners about 72% of its top line from Maruti, around 18% from Tata Motors and ~7% from M&M. In the year to date period (April-August 2009), these key clients registered robust growth in their sales volume beating all expectations.
Maruti reported a growth of 25.3%, Tata Motors registered a growth of 7% in its passenger car sales and M&M posted a 36% growth in its utility vehicle sales.
Apart from exclusive supply contracts for some of the latest launched products such as Maruti’s A-Star and Ritz and M&M’s Xylo, Subros will also start supplying air conditioners to Tata Motors’ Nano from January 2010 onwards, which will help further augment its volume growth.
In line with the increase in our estimates, our price target stands revised to Rs50 (based on 10x FY2011 earnings estimate). At the current market price the stock is trading at 8.2x its FY2011E earnings and enterprise value (EV)/earnings before interest, tax, depreciation and amortization (EBITDA) of 3.6x. We maintain our BUY recommendation on the stock.