Expansion Into EV Components And New Facilities Will Improve Future Prospects

Key Takeaways

• Aggressive cost-cutting and localization efforts aim to boost net margins and profitability.
  
• Expansion in electric, hybrid, and alternative fuel technologies positions Subros for substantial long-term growth.
  
• Supply chain issues, market dependency, and aggressive expansion may impact Subros's profitability, costs, and revenue growth amid competitive and technological challenges.

Catalysts

Engages in the manufacture and sale of thermal products for automotive applications in India.

• Subros is focusing on aggressive cost-cutting, improving internal efficiency, and increasing localization, which is expected to enhance net margins and profitability in the future.
  
• The company is advancing into technologies for electric and hybrid vehicles, with components in these areas projected to contribute more than 20% of its revenue in the next 1 to 2 years, potentially boosting overall revenue growth.
  
• Subros plans significant capacity expansion with a new facility in the Kharkhoda project, for which they have approved an investment of ₹150 crores, aiming to sustain manufacturing growth.
  
• The implementation of a mandatory AC cabin for N2, N3 category vehicles from October 2025 is expected to drive substantial growth in Subros's truck segment, positively impacting revenue.
  
• Subros's strategic initiatives in expanding its product range and capturing markets in alternative fuels like CNG, hybrid, and electric vehicles are anticipated to position the company for long-term growth, consequently enhancing earnings.

Subros Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Subros's revenue will grow by 12.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 6.2% in 3 years time.
• Analysts expect earnings to reach ₹2.9 billion (and earnings per share of ₹44.69) by about April 2028, up from ₹1.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.9x on those 2028 earnings, down from 29.8x today. This future PE is lower than the current PE for the IN Auto Components industry at 28.4x.
• Analysts expect the number of shares outstanding to decline by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.67%, as per the Simply Wall St company report.

Subros Future Earnings Per Share Growth

Risks

• Supply chain disruptions and foreign exchange impacts have previously affected EBITDA, and there is a risk that future commodity price changes or currency fluctuations could similarly affect profitability. [EBITDA, net margins]
  
• The company's growth assumption may depend heavily on industry trends and macroeconomic factors that are difficult to predict and could lead to lower-than-expected revenues if the market for passenger vehicles, especially EVs and hybrids, slows down. [Revenue]
  
• Dependence on imported components, particularly for e-compressors, and uncertainty about localization timelines may lead to increased costs and lower margins if supply chain challenges persist. [Net margins, cost of goods sold]
  
• The aggressive expansion strategy, including significant investments in a new plant, carries execution risk, which might lead to delays or higher-than-anticipated expenditure, affecting the return on equity and overall financial performance. [Earnings, capital expenditures]
  
• Competitive pressures in key segments, such as passenger vehicle air conditioning and potential underperformance in new sectors like EVs and railways if technological advancements do not proceed as anticipated, may limit revenue growth and market share. [Revenue, market share]

Valuation

• The analysts have a consensus price target of ₹821.667 for Subros based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹47.0 billion, earnings will come to ₹2.9 billion, and it would be trading on a PE ratio of 26.9x, assuming you use a discount rate of 13.7%.
• Given the current share price of ₹616.1, the analyst price target of ₹821.67 is 25.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.