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3QFY2012 Result Update | Auto Ancillary

February 6, 2012

Subros
Performance Highlights
Y/E March (` cr) Net sales EBITDA EBITDA margin (%) Reported PAT
Source: Company, Angel Research

ACCUMULATE
CMP Target Price
% chg (yoy) (7.1) 6.3 107bp (62.5) 2QFY12 240.5 18.9 7.9 3.1 % chg (qoq) 5.5 13.8 62bp (33.7)

`26 `28
12 Months

3QFY12 253.8 21.6 8.5 2.1

3QFY11 273.3 20.3 7.4 5.5

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

Auto Ancillary 156 0.4 38/21 7,877 2 17,707 5,362 SUBR.BO SUBR@IN

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 companys 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 `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 companys 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 `2.1cr on account of an 88.1% yoy (21.3% qoq) increase in interest cost. Outlook and valuation: We expect revival in the companys 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 `28, valuing SUBR at 6x FY2013E earnings.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 40.0 9.1 27.2 23.7

Abs. (%) Sensex Subros

3m 0.8

1yr (1.7)

3yr 90.4 76.8

(3.7) (31.6)

Key financials
Y/E March (` cr) Net sales % chg Net profit % chg OPM (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2010 905 30.4 28.1 109.5 10.3 4.7 5.6 0.8 14.4 15.5 0.3 3.2

FY2011 1,089 20.3 28.5 1.6 8.1 4.9 5.3 0.7 13.1 11.4 0.3 4.0

FY2012E 1,016 (6.7) 17.4 (39.2) 8.7 2.9 9.0 0.7 7.4 8.4 0.4 4.7

FY2013E 1,181 16.2 28.0 61.6 8.7 4.7 5.6 0.6 11.5 9.7 0.3 3.7

Yaresh Kothari
022-39357800 Ext: 6844 yareshb.kothari@angelbroking.com

Please refer to important disclosures at the end of this report

Subros | 3QFY2012 Result Update

Exhibit 1: Quarterly performance


Y/E March (` cr) Net Sales Consumption of RM (% of Sales) Staff Costs (% of Sales) Other Expenses (% of Sales) Total Expenditure EBITDA EBITDA margin (%) Interest Depreciation Other Income PBT (excl. Extr. Items) Extr. Income/(Expense) PBT (incl. Extr. Items) (% of Sales) Provision for Taxation (% of PBT) Reported PAT PATM (%) Equity shares (cr) EPS (`)
Source: Company, Angel Research

3QFY12 253.8 182.1 71.8 22.8 9.0 27.4 10.8 232.2 21.6 8.5 7.6 12.2 0.4 1.8 2.2 0.9 0.1 6.0 2.1 0.8 12.0 0.3

3QFY11 273.3 206.5 75.6 17.2 6.3 29.3 10.7 253.0 20.3 7.4 4.0 10.1 0.5 6.1 6.6 2.4 1.1 18.1 5.5 2.0 12.0 0.9

% chg (7.1) (11.8) 32.0 (6.4) (8.2) 6.3 88.1 20.2 (26.5) (70.4) (67.1) (90.1) (62.5)

9MFY12 746.5 528.4 70.8 62.8 8.4 89.9 12.0 681.0 65.5 8.8 19.8 33.6 2.0 12.0 14.0 1.9 0.8 6.5 13.2 1.8 12.0

9MFY11 785.4 595.7 75.8 48.2 6.1 81.3 10.4 725.3 60.2 7.7 12.1 29.8 1.3 18.3 19.6 2.5 2.1 11.4 17.5 2.2 12.0 2.9

% chg (5.0) (11.3) 30.1 10.5 (6.1) 8.8 64.2 12.9 52.3 (34.3) (28.7) (62.7) (24.6)

(62.5)

2.2

(24.6)

Net sales decline by 7.1% yoy, led by a 13% yoy decline in volumes: SUBR reported a 7.1% yoy decline in its net sales to `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 companys 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. Volumes expanded sequentially, led by improvement in volumes of OEMs like Tata Motors and Mahindra and Mahindra.

February 6, 2012

Subros | 3QFY2012 Result Update

Exhibit 2: Volumes down by 13% yoy


(units) 300,000 250,000 200,000 150,000 100,000 50,000 0 (24.0) 14.2 13.8 Volume 48.5 30.0 18.1 17.2 0.5 (13.0) yoy change (RHS) (%) 60.0 50.0 40.0 30.0 20.0 10.0 0.0 (10.0) (20.0) (30.0)

Exhibit 3: Realization improves by 6.7% yoy


(`) 14,000 13,500 13,000 12,500 12,000 11,500 11,000 1.4 (1.9) (1.9) 1.4 3.9 7.3 6.7 Net realisation 13.2 yoy change (RHS) 13.8 (%) 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 (2.0) (4.0)

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

Source: Company, Angel Research

3QFY12

Source: Company, Angel Research

Operating margin improves to 8.5% due to localization benefits: 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). SUBR has been successful in managing its raw-material expenses as it has commenced local production of evaporators (which were earlier imported). On the other hand, a 266bp yoy increase in staff cost due to increased headcount restricted margin expansion during the quarter. As a result, the companys operating profit grew marginally by 6.3% yoy (13.8% qoq) to `21.6cr.

Exhibit 4: EBITDA margin trend


(%) 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 11.3 10.5 9.1 6.7 7.4 8.9 9.9 7.9 8.5 73.3 EBITDA margin 73.3 74.0 77.7 75.6 Raw material cost/sales 74.7 70.0 70.5 71.8

Exhibit 5: Net profit down 62.5% yoy


(` cr) 12 10 8 6 4 2 0 1.8 2.0 1.3 0.8 Net profit 3.8 3.6 3.0 Net profit margin (RHS) 3.6 3.2 (%) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

Source: Company, Angel Research

Source: Company, Angel Research

Net profit falls sharply due to higher interest cost: SUBRs net profit nosedived by a steep 62.5% yoy (33.7% qoq) to `2.1cr on account of an 88.1% yoy (21.3% qoq) jump in interest cost and a 20.2% yoy increase in depreciation expense.

February 6, 2012

3QFY12

3QFY12

Subros | 3QFY2012 Result Update

Investment arguments
Volume growth to revive in FY2013 with easing of interest rates: The passenger vehicles (PV) segment is witnessing a slowdown in volume growth, as consumer sentiment remains weak due to macroeconomic concerns such as rising interest rates, high inflation and fuel price hikes. However, with interest rates expected to ease from 1QFY2013, we expect revival in demand for passenger cars. Given the companys dependence on the passenger car segment, we expect volumes to grow by 13.5% in FY2013E. Maintain leadership position on expanding product base: A market leader and the largest player in the domestic car AC market, SUBR enjoys more than 40% market share. The company has managed to garner a high market share on the back of its strong technological expertise backed by Denso and Suzuki. Further, in view of growing PV volumes, SUBR has increased its capacity to 1.2mn units per year (FY2011) and proposes to expand its capacity to 1.5mn units per year in the first phase (FY2012E) and further to about 2mn units per year in the next two-three years. Capacity expansion will enable the company to assure volume to its OE customers and, thus, maintain its market share. SUBR is also setting up a new facility in Chennai to cater to auto manufacturers in Chennai. The company will also be investing about `100cr in the next two years to expand production capacities of its existing three facilities in Noida, Manesar and Pune. Management also proposes to foray into the CV segment, targeting leaders such as Ashok Leyland and Eicher, to expand its product base and explore new avenues.

Outlook and valuation


We expect revival in the companys 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. At `26, the stock is trading at 9x FY2012E and 5.6x FY2013E earnings. We recommend Accumulate on the stock with a target price of `28, valuing SUBR at 6x FY2013E earnings.

Exhibit 6: Key assumptions


Volumes (units) AC system Auto yoy change (%) FY2008 506,016 8.2 FY2009 618,750 22.3 FY2010 747,704 20.8 FY2011 895,072 19.7 FY2012E 774,237 (13.5) FY2013E 878,759 13.5

Source: Company, Angel Research

February 6, 2012

Subros | 3QFY2012 Result Update

Exhibit 7: One-year forward P/E band


(`) 70 60 50 40 30 20 10 0
Feb-07 Sep-05 Nov-07 Sep-10 May-11 Dec-04 Aug-03 Dec-09 Feb-12 Jun-06 Apr-04 Apr-09 Jul-08

Price (`)

4x

6x

8x

10x

Source: Company, Bloomberg, Angel Research

Exhibit 8: Auto Ancillary Recommendation summary


Company Amara Raja Automotive Axle Bharat Forge* Bosch India
# ^

Recommendation Accumulate Neutral Neutral Neutral Neutral Accumulate Neutral Accumulate

CMP (`) 233 481 306 7,436 138 1,213 161 26

Tgt. price (`) 250 1,359 28


#

Upside (%) 7.4 12.1 7.9

P/E (x) FY12E 11.1 12.6 16.8 21.8 26.0 11.7 17.8 9.0
^

EV/EBITDA (x) FY12E 6.4 6.8 8.2 13.5 14.9 6.4 8.6 4.7 FY13E 5.4 5.4 7.1 11.7 10.3 5.3 7.2 3.7 9.8 9.8 15.2 19.8 17.6 10.7 13.5 5.6

RoE (%) FY12E 24.7 25.7 19.9 21.3 15.6 26.3 20.2 7.4 FY13E 22.9 27.6 18.7 19.5 20.3 22.9 22.7 11.5

FY11-13E EPS CAGR (%) 17.3 29.4 27.1 17.2 2.4 24.5 10.0 (0.9)

FY13E

Exide Industries FAG Bearings# Motherson Sumi* Subros

Source: Company, Angel Research; Note: * Consolidated results;

December year end;

September year end

February 6, 2012

Subros | 3QFY2012 Result Update

Profit and loss statement


Y/E March (` cr) Gross sales Less: Excise duty Net Sales Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation & Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Recurring PBT % chg Extraordinary Items PBT Tax (% of PBT) PAT Adj. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY08 774 111 663 663 2.4 579 455 33 46 45 83 12.4 12.6 33 51 9.0 7.7 11 1 2.8 41 2.8 41 12 30.4 29 29 2.9 4.3 4.8 4.8 2.9 FY09 787 92 694 694 4.8 631 516 31 44 39 63 (24.2) 9.1 32 32 (37.8) 4.6 15 2 8.5 19 (54.8) 18 5 28.3 13 13 (53.2) 1.9 2.2 2.2 (53.2) FY10 984 78 905 905 30.4 813 672 38 54 48 93 46.9 10.3 38 54 72.0 6.0 16 1 3.0 40 112.6 40 11 28.9 28 28 109.5 3.1 4.7 4.7 109.5 FY11 1,203 114 1,089 1,089 20.3 1,001 821 54 64 63 88 (5.3) 8.1 41 47 (12.8) 4.4 18 2 6.5 32 (19.0) (1) 33 3 10.5 30 29 1.6 2.6 4.9 4.8 1.6 FY12E 1,123 107 1,016 1,016 (6.7) 928 722 62 84 60 88 0.6 8.7 45 43 (9.2) 4.2 27 3 15.0 19 (39.8) 19 2 10.0 17 17 (39.2) 1.7 2.9 2.9 (39.2) FY13E 1,305 124 1,181 1,181 16.2 1,078 839 72 98 70 103 16.7 8.7 49 55 27.1 4.6 27 4 12.5 32 66.2 32 4 12.5 28 28 61.6 2.4 4.7 4.7 61.6

February 6, 2012

Subros | 3QFY2012 Result Update

Balance sheet
Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Reserves & Surplus Shareholders Funds Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 363 194 169 40 151 8 25 118 67 84 293 436 218 219 38 182 11 29 141 109 73 331 483 256 227 69 193 13 35 146 117 76 372 548 281 267 115 2 269 18 65 186 190 79 463 658 326 332 53 3 277 42 61 174 107 170 557 711 375 337 57 3 351 77 71 203 181 170 566 12 162 174 111 8 293 12 172 184 135 12 331 12 195 207 154 11 372 12 218 230 218 15 463 12 227 239 303 15 557 12 237 249 303 15 566 FY08 FY09 FY10 FY11 FY12E FY13E

February 6, 2012

Subros | 3QFY2012 Result Update

Cash flow statement


Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Less: Others Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec. in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balance Closing Cash balance FY08 41 33 11 14 (1) (12) 85 49 1 (46) (15) 6 (21) (0) 8 7 FY09 18 32 21 16 (2) (5) 80 72 2 (69) 24 6 (0) 18 4 7 11 FY10 40 38 3 10 (1) (11) 79 77 1 (75) 19 4 (0) 16 2 11 13 FY11 33 41 (28) 5 (2) (3) 45 111 2 2 (108) 64 6 2 56 5 13 18 FY12E 19 45 (68) (3) (2) (8) (48) (1) 3 (46) 85 7 78 24 18 42 FY13E 32 49 34 (4) (4) 106 (58) (0) 4 (54) 18 (18) 35 42 77

February 6, 2012

Subros | 3QFY2012 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis EBIT margin Tax retention ratio Asset turnover (x) RoIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating RoE Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT/Interest) 0.6 1.2 4.7 0.7 2.0 2.2 0.7 1.5 3.4 0.9 2.2 2.7 1.1 2.9 1.6 0.9 2.2 2.1 1.9 53 15 31 46 1.7 47 21 42 36 2.0 37 21 43 25 2.1 45 17 49 21 1.7 44 18 50 34 1.7 44 19 50 34 17.6 17.8 17.6 10.1 9.9 7.5 15.5 15.1 14.4 11.4 10.7 13.1 8.4 8.4 7.4 9.7 11.2 11.5 7.7 0.7 2.4 12.6 6.4 0.7 16.8 4.6 0.7 2.3 7.5 8.5 0.6 6.9 6.0 0.7 2.7 11.4 7.9 0.7 13.7 4.4 0.9 2.7 10.5 8.4 0.8 12.2 4.2 0.9 2.1 8.1 9.2 1.0 7.0 4.6 0.9 2.4 9.5 7.7 1.0 11.3 4.8 4.8 10.2 0.8 29.0 2.2 2.2 7.5 0.5 30.7 4.7 4.7 11.1 0.7 34.5 4.9 4.8 11.7 0.8 38.4 2.9 2.9 10.5 1.0 39.9 4.7 4.7 12.8 2.5 41.5 5.4 2.6 0.9 3.1 0.3 3.1 0.9 11.6 3.5 0.8 1.9 0.4 4.4 0.8 5.6 2.3 0.8 2.7 0.3 3.2 0.8 5.3 2.2 0.7 3.1 0.3 4.0 0.8 9.0 2.5 0.7 3.8 0.4 4.7 0.7 5.6 2.0 0.6 9.6 0.3 3.7 0.7 FY08 FY09 FY10 FY11 FY12E FY13E

February 6, 2012

Subros | 3QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Subros No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

February 6, 2012

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