SEL has grown from sales of around Rs. 500mn in early 2000s to India’s largest control cables company in the past 20+ years with FY22E sales of nearly Rs. 20bn. In FY02, sales in India accounted for 99% of revenues -96% of which were to 2-wheeler companies.

As part of its growth strategy, SEL took a big step towards geographic and product diversification in FY16. They started with the acquisition of halogen lamp manufacturer Phoenix Lamps in May 2015. During FY17, they acquired Wescon, a leading mechanical and electronic control cables company in the USA catering to the non-automotive market. Post these deals, Indian revenues were at 50% and a new non-automotive revenue line ~25% got added to the business. The acquisition of Phoenix Lamps also meant that Suprajit had a far bigger presence in the replacement/aftermarket. With the completion of their latest acquisition (LDC) in FY22, we expect their India sales to be ~35% of total sales come FY23. Over this journey (with 5 acquisitions across India, Europe, and USA) revenues and profits have compounded in the mid 20’s while achieving solid 30% plus return on capital.

* FY21 After Market sales of 27% includes 20% of lamps division sales.

The last few years have been a very challenging period for the auto sector and consequently for the automotive part suppliers with respect to growth. India has seen various regulatory changes regarding insurance & emission norms and both India & the international markets suffered at the hands of the covid-19 pandemic. Despite these headwinds, SEL, helped by its push into new products and geographies has managed to compound its revenues and profits at 12% and 15% respectively over the last 5 years – at a rate significantly faster than the automotive sector.

A higher share of lamps and international business in the mix has resulted in Operating margins (EBITDA) dropping marginally to 14-15% range from its earlier cables-only business margin range of 16-18%. However, business profitability (ROE) has remained steady in the ~20-22% range.

To push innovation and increase its share of wallet with its customers, Suprajit set up an R&D centre in Bangalore – Suprajit Technical Centre (STC) in 2015. The objective here was to improve value proposition for its cable customers and to develop new & technologically advanced products. Over the last few years, STC has filed 15 patents in products ranging from digital speedometer, throttle sensor etc. A speedier gear box with electromechanical clutches is in the final stage of commercialization. SEL has been able to win an estimated Rs. 1bn of additional business from some of these new products commercialized in STC.

In October 2021, SEL announced that it will acquire the Light Duty Cable (LDC) unit of Kongsberg Automotive at an enterprise value of US$ 42mn. This is a transformative acquisition for SEL, and it will emerge as a leading control cables player globally. This LDC unit supplies cable products to automotive, non-automotive and 2-wheeler segments and has a presence in the Electro-Mechanical Actuators (EMA) segment. SEL will acquire three plants in Mexico, Hungary, and China (Shanghai) where it has no existing manufacturing footprint. This business has marquee global customers such as Tesla, Honda, FCA, Land Rover, Lear Corporation, Magna amongst others in automotive, non-automotive and 2-wheeler businesses – a lot of these are new relationships for SEL.

With this acquisition, SEL also acquires the actuation technologies which it did not previously have, which it can offer to existing/other customers. LDC has certain unutilized capacities and in addition, there is head room to rationalize costs and overheads to improve margins of this business over time. Like its previous inorganic initiatives, SEL has been very disciplined with this acquisition. We believe this will have a pay-back of under 5 years and will add significant value to the company.

SEL now trades at its lifetime high. We continue to like the company for:

1. Its strong presence in cables and lamps business globally and its effort to become a leading global cables manufacturer across geographies
2. Its ability to do value accretive M&A
3. Its ability to profitably grow revenue from existing customers through new products & geographic diversification
4. Its ability to build a strong organisation with a stable and multi-cultural management team

Over the last 5-7 years (post the Phoenix lamps acquisition) SEL has been on its journey to transform from being a 2-Wheeler focused cables company operating in India to a diversified auto parts supplier across multiple products and geographies. Markets have appreciated its effort with the stock price up nearly 4x during this period. Currently the company trades at 18x its expected FY 23 earnings. We remain firm believers in the management and the execution capabilities of SEL. If this transformation journey and execution continues as in the past, we think Suprajit is very well placed to benefit from an impending auto cycle and grow and compound its share prices especially as it becomes more widely appreciated.

Market & Performance Update

For the 9 months of FY22 (April 2021 to December 2021), the QRC Long Term Opportunities Portfolio (LTOP) was up 33.9%. Our 1-year return for the period January 2021 to December 2021 period is 41%. The broad-based rally seen during the last few quarters abated amid concerns of sharp rise in inflation (in India and globally) and worries around the spread of Omicron. The December quarter saw the benchmark Nifty index fall by 1.5% and the mid-cap index by 1.1%.

*Individual client portfolio returns may differ based on timing of their investment and specific instructions/circumstances. QRC returns are TWRR post fees & expenses. Source: BSE & NSE

Portfolio Snapshot

*Individual client portfolio returns may differ based on timing of their investment and specific instructions/circumstances.

Looking Ahead

With decade high inflation readings across the western world, the topic du jour is higher interest rates. The US Fed has already indicated a path to lowering its asset purchase program (‘tapering’) and most macro watchers are expecting 3 to 4 interest rate increases by them in CY2022. The US 10-yr treasury yield has already risen from a low of ~1.25% in August 2021 to 1.75% and is moving towards the pre-covid levels of ~1.9-2% seen in late 2019. Even in India, the 10-yr yield has moved up from <6% in mid-2020 to 6.5%+ currently. While interest rates are rising, the pace as of now seems to be moderate and well understood by the markets. Demand environment in India remains strong especially for discretionary goods and urban consumers. Rural India has suffered much more because of the all-round inflationary pressures and unseasonal rains/disruptions. With our exposure to sectors like financials, autos, realty and building materials, we believe we are well positioned to capitalize on this strong demand. Consumer staples in our portfolio and in general may suffer for some more time as they pass through the inflation in costs which impact their volume growth. However, these businesses have an extraordinarily strong history of bouncing back from such headwinds. While our stock picking remains bottom up, we will be keeping a keen eye on central bank actions and watch for a policy mistake i.e., too much or too quick a tightening of financial conditions in an environment where the governments around the world will be looking to take away the fiscal support provided to cushion the covid blow over the last 12-18 months.

We thank you for entrusting us with your money. Do feel free to reach out to us with your questions or suggestions.

Sincerely,

Ayaz & Saurabh