Stock Review: Subros

Topline Growth A Concern; Stock Looks Cheaper With P/E At Close To 10

   THE stock of auto ancillary firm Subros has outperformed the broader market indices in the past one year following its robust financial performance. The stock has gained 30% in one year, much higher than the 16% return in the Sensex. The company has benefited due to improved demand from the makers of passenger vehicles, which in turn have seen higher offtake.

   Subros is the largest player in the domestic car air conditioners market, and enjoys nearly half of the market share in the segment. Most of its business comes from just two customers — Maruti Suzuki and Tata Motors. It caters to more than half of the requirements of these two vehicle manufacturers.

   To reduce the dependence on passenger vehicles and expand its revenue base, the company has recently decided to set up a plant in Chennai to cater to the commercial vehicle players such as Ashok Leyland, Eicher and the truck division of Tata Motors.

   Its revenue grew 11% to Rs 233 crore in the June 2010 quarter from the year-ago level. A concern here is that the sequential growth in the topline is slowing down. For instance, it reported a 6% decline in revenues in the June quarter compared to the previous quarter. This is in sharp contrast to 9% sequential sales jump in the fourth quarter of the past fiscal.

   The latest auto sales figures, however, may provide some solace for investors. In August, auto companies reported a firm demand scenario. This offers a reasonable revenue visibility for the quarter ending September 30.

   The company has plans to invest Rs 100 crore in the next two years that will increase its capacity by 50% to 1.5 million units. This should help the company's strategy to diversify into commercial vehicles segment.

   At the Thursday's closing price of Rs 51, the stock appears cheaper with a price-earning ratio of close to 10 on a stand-alone basis for trailing four quarters ended June. The average P/E for the auto ancillary sector is 17. While the company is geared up to take advantage of future industry demand through its expansion, a lot depends upon whether the auto sector would be able to sustain the current demand pull.