Mumbai: Two years after Sona Okegawa Precisions Forgings Ltd acquired the loss-making German precision forging company ThyssenKrupp Präzisionsschmiede GmBH, Sona Group chairman Surinder Kapur said the European unit is on track to turn profitable in two years.
“The European operations will stop bleeding, we will make profit by 2012,” Kapur said, adding that restructuring and cost-saving measures have helped US operations of Sona BLW Präzisionsschmiede GmBH, as the firm has been renamed, break even over the past three months. Sona BLW has operations in India apart from the US and Germany.
Sona Okegawa, a 75:25 joint venture between Sona Holding and Mitsubishi Materials Corp., is part of the Rs3,500 crore auto component-making Sona Group that comprises six firms, of which only the flagship Sona Koyo Steering Systems Ltd is listed. The group does not declare consolidated earnings.
The erstwhile ThyssenKrupp Präzisionsschmiede, a Duisburg, Germany-based firm that makes high precision forging components for cars, trucks, agricultural applications and construction equipment makers, was taken over by Sona Okegawa in January 2008 as part of a growth-by-acquisition strategy between 2002 and 2007 to access technology and attract business from global auto makers.
Seeking revival: A file photo of a Sona Group plant in Gurgaon. The group’s chairman says restructuring and cost-saving steps have helped Sona BLW’s US operations break even over the past three months.
In that period, other Indian firms such as Bharat Forge Ltd, Amtek Auto Ltd and Mahindra Systech also adopted similar growth plans as India became an auto component manufacturing hub as well as a fast growing market for passenger vehicles as economic growth accelerated.
Demand for trucks and construction equipment collapsed globally during the financial crisis that began last year, cutting Sona BLW’s European revenue to €16 million (Rs109 crore today) in November from €29 million a year earlier, and halving revenue to €170 million in the first 11 months of calendar 2009 from all of last year.
“Even at this level, we have done enough cost saving and internal restructuring and managed to break even in the last three months” in the US division, Kapur said, adding that “financially, the company is out of the woods” and that demand should start picking up in February.
Sona BLW, which has six plants in Germany, has cut its workforce in that country by a third—to 1,000 from 1,500. With no expansion plans for Europe, new product technology expansion will take place in India and the US, he said.
Sona BLW has 60 cost-cutting projects under way, overseen by a steering committee with members from the supervisory board and the workforce, with a view to cutting fixed costs that eat into at least two-thirds of sales.
With manpower forming the bulk of such fixed costs in Europe, Kapur opted for a mix of paring salaries and reducing employees—while some agreed to forego their annual Christmas bonus in 2008, the contracts of others were not renewed.
Analysts are sceptical about whether the revival can be sustained, saying the spurt in European car sales has largely been the function of a now-discontinued scrappage incentive on cars.
“The scheme has a multiplier effect, hence even if Sona BLW doesn’t supply to small car makers, it will be adversely impacted with sales slowing,” said Mahantesh Sabarad, an analyst at Centrum Broking Ltd. Profitability will also be determined by the ability to gain new customers, he said.
At home, the flagship company Sona Koyo Steering is focusing on localizing electrical power steering production from current levels of 55% to at least 70% by January. A company executive said this would be achievable quickly because the process calls for a quantum jump instead of gradual increases.
In a 13 November report, Viren Bajalia and Pooja M. Sharma, analysts at IDBI Capital, wrote that the performance of Sona Koyo during the last fiscal was hit by lower volume growth in the domestic market and unfavourable conditions across all cost elements.
However, a revival is expected in the current fiscal ending March on the back of strong sales by Maruti Suzuki India Ltd, Hyundai Motor India Ltd and Mahindra and Mahindra Ltd—who together contribute 80% of Sona Koyo’s revenue, they said in the report.
In the three months to 30 September, the surge in car sales has allowed Sona Koyo to swing to a Rs3.71 crore profit from a loss of Rs7 crore in the year earlier. However, it still has debt of Rs850 crore, a number Kapur says he wants to bring down.
Kapur plans to cut the debt-equity ratio from 1.43 to 1.2 in two years. He didn’t share details of the plan.
However, currency appreciation and raw material price fluctuations could narrow margins, IDBI Capital’s Bajalia and Sharma wrote. High import content, currency fluctuation and metal prices—steel surged 75% to $750 (Rs34,950) a tonne from a year ago—sent Sona Koyo from a Rs25.2 crore profit in fiscal 2008 to a loss of Rs31 crore in the year to March 2009.