SUPRAJIT - Suprajit Engineering Ltd. Share Price

In the Q1 FY26 earnings call, Suprajit Engineering's management provided an optimistic outlook amidst challenging economic conditions. The company reported a consolidated revenue of INR 7,733 million, a 5.2% year-on-year increase, while the EBITDA rose to INR 993 million, reflecting a 15% growth and an improvement in margins by 100 basis points to 12.8%.

Key forward-looking points include:

1. Controls Division Turnaround: There is a significant turnaround in the Suprajit Controls Division, with EBITDA margins improving from 8% to 12%. The management expects that the division will further bolster profitability and growth due to operational efficiencies.

2. Integration of SCS: The management aims for Stahlschmidt Cables (SCS) to become EBITDA positive by Q4 FY26. The integration efforts, including closing inefficient operations and improving productivity, are underway.

3. Technology Developments: The Suprajit Technology Center is set to inaugurate a new facility in 2026, focusing on developing advanced technologies for braking systems and electronics. This initiative is aimed at enhancing the global competitiveness of the company's offerings.

4. Tariff Strategy: Management reported that 30-35% of clients are prepared to accept higher tariffs due to geopolitical factors, with ongoing negotiations to mitigate related costs.

5. Capex Plans: The company outlined a capex outlook of INR 150-160 crores, focused on expanding infrastructure and technology capabilities, which will be spread over FY26 and FY27.

6. Market Resilience: Despite a soft outlook in some segments like the Phoenix Lamps Division due to geopolitical uncertainty, management expressed confidence in recovery in the second half of FY26, supported by a strong aftermarket position.

Overall, the management conveyed a commitment to capitalize on operational improvements and market opportunities, establishing a foundation for sustainable future growth.

Earnings Call Q&A Summary

Question 1: "Can you provide a breakup in terms of the increase in employee costs and the reason behind the increase in gross margins?"

Answer: The employee costs rose due to a one-time reduction of personnel in Germany, around INR 1.2 million, alongside new senior hires at STC and corporate levels. STC now employs about 110. Despite these costs, operational efficiencies improved at Suprajit Controls Division, resulting in a 100 basis point margin increase. Thus, overall gross margins improved despite challenging standalone performances.

Question 2: "Would it be fair to say we incurred restructuring costs of INR 15-20 crores this quarter, and how much annualized investment will go into STC?"

Answer: Yes, your estimate on restructuring costs seems accurate. Regarding STC, while around INR 20-25 crores are expected annually, it's essential to note that significant IT costs from our SAP HANA rollout also contribute to expenses at DCD. The costs are not solely from STC but include various operational enhancements.

Question 3: "With the impending ABS regulation set for January 2026, what is our strategy regarding ABS and CBS systems?"

Answer: We're currently preparing for ABS production and expect potential delays due to the industry's readiness issues. While ABS is mandated for front brakes, CBS remains relevant for back brakes, allowing for flexibility in future models. We have a viable CBS product that can work alongside ABS setups.

Question 4: "Can you provide details about the recent large order from a U.S. department store?"

Answer: The order pertains to a major chain store, and while I can't disclose specific volume figures due to confidentiality, we have been working toward this launch for some time, promoted under their brand rather than ours.

Question 5: "What does the response from 30-35% of clients agreeing to accept tariff hikes imply for future revenue?"

Answer: This implies that 30-35% of clients have accepted increased tariffs, with an additional 30-35% in discussions about billing logistics. We expect to receive around 70-75% of revenues from this compliance soon, easing potential tariff impacts on our overall cash flow.

Question 6: "With recent acquisitions, how will you utilize future cash flows, especially regarding deleveraging or return of capital to shareholders?"

Answer: Right now, our focus is on integrating recent acquisitions and restructuring operations. Immediate cash flows will be allocated to these areas, while future discussions with the Board will help determine if dividends or share buybacks will occur, adhering to our existing distribution policy.

Question 7: "What is the current revenue expectation for the SCS division post-acquisition?"

Answer: We estimate that the SCS division, inclusive of the Canadian and Chinese operations, could generate around USD 30-35 million in revenues for FY '26, with expectations to increase as we normalize operations over the coming quarters.

Question 8: "What's the mid-term margin outlook for the SCS division?"

Answer: We're working towards achieving EBITDA positivity for the SCS division by Q4 2025. The first quarter's performance was limited, but as restructuring completes, we expect to gain operational efficiencies that will support improved margins.

Question 9: "Is there a growth strategy following the acquisition of LDC regarding product offerings?"

Answer: Since acquiring LDC, we've integrated its operations into our broader supply chain. This has enabled us to leverage its technology while enhancing our actuation offerings, leading to exponential growth in the global market for electrical and mechanical components.

Question 10: "Will you share more on the Beyond Cable strategy?"

Answer: Our Beyond Cable strategy emphasizes transitioning from traditional mechanical systems to electromechanical actuators, which encompass electronic and sensor technology innovations. This enables us to stay relevant in the competitive market by addressing modern automotive needs across multiple vehicle types.