A New Greenfield Project At Kharkhoda Will Expand Capacity To Meet Future Demand From FY '26 Onwards

Key Takeaways

• Subros aims to boost truck segment revenues through mandatory AC regulations and explore growth in railway projects and services.
  
• Ongoing localization and a new greenfield project aim to cut costs and expand capacity for future revenue growth.
  
• Dependency on Maruti Suzuki and delayed EV plans could challenge Subros' revenue stability amidst supply chain issues and cash flow pressures.

Catalysts

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

• Subros is targeting to capitalize on the mandatory regulation for AC cabins in trucks starting October 2025, which is expected to significantly drive revenues, particularly in the truck segment.
  
• The company has significant opportunities in the railway segment, with emerging double-digit growth expected over the next 2-3 years, potentially enhancing revenue and profitability through projects and service contracts.
  
• Subros is advancing in the electric and hybrid vehicle markets, where 20% of its current revenue comes from. Continued focus here could lead to substantial revenue growth and diversification.
  
• Localization efforts are ongoing to reduce the import content from 16% to below 10%, which could enhance net margins through cost efficiencies and reduced foreign exchange risk.
  
• A new greenfield project at Kharkhoda is anticipated to add substantial capacity to cater to future demand, which is expected to positively impact revenue from FY '26 onwards.

Subros Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Subros's revenue will grow by 11.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 5.9% in 3 years time.
• Analysts expect earnings to reach ₹2.7 billion (and earnings per share of ₹35.58) by about January 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 33.9x on those 2028 earnings, up from 31.6x today. This future PE is greater than the current PE for the IN Auto Components industry at 19.1x.
• Analysts expect the number of shares outstanding to grow by 4.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.56%, as per the Simply Wall St company report.

Subros Future Earnings Per Share Growth

Risks

• The Indian passenger vehicle industry demonstrated slower-than-expected growth with a degrowth of 0.7% in Q2, potentially impacting Subros' revenue growth from this segment.
  
• Subros faces challenges from ongoing supply chain disruptions and logistical delays, which could increase operational costs and negatively impact net margins.
  
• The company's current inventory and trade receivables have increased, indicating potential pressures on cash flows and working capital management.
  
• Subros' high dependence on a single customer, Maruti Suzuki, which contributes around 80% of its sales, poses a risk to revenue stability if this customer diversifies its supplier base or experiences a downturn.
  
• If projections for electric vehicle penetration don't materialize, the decision to delay establishing an electric compressor manufacturing line may affect future earnings from the EV market segment.

Valuation

• The analysts have a consensus price target of ₹831.67 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 ₹44.8 billion, earnings will come to ₹2.7 billion, and it would be trading on a PE ratio of 33.9x, assuming you use a discount rate of 13.6%.
  
• Given the current share price of ₹624.05, the analyst's price target of ₹831.67 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.