With auto makers riding a new boom, can ancillary makers be far behind?
Sundram Fasteners Ltd (SFL), a TVS Group company that controls half the market in high-tensile fasteners and has nearly 40% of turnover accruing from the automotive segment, is likely to be among the beneficiaries.
In fact, during the first quarter of FY10, SFL had already pulled off a smart recovery in revenue and net profit, both of which had been steadily falling in the previous three quarters. Stringent cost control and lower raw material prices, together with a firm 15-20% increase in demand from the domestic passenger vehicles industry, fuelled the turnaround. That turnaround continues.
“A slew of new models are due to hit the market,” says a company official. That implies a better order book for SFL, whose client list includes MarutiSuzuki India Ltd, Tata Motors Ltd and Mahindra and Mahindra Ltd. Besides, the commercial vehicle (CV) segment too has started to improve—supplies to CVs are of higher value and account for nearly 35% of SFL’s turnover.
In the June quarter, SFL’s revenue grew 26% over the previous quarter and the September quarter is expected to show similar growth. Operating profit margin (OPM), which had dropped from 16% in Q1 FY09 to 7% by Q4 of the same fiscal, is now gradually expanding. For all of FY10, the OPM should be around 10-11%. Net profit growth would be more robust compared with the year-ago period as FY09 reflected forex losses of around Rs60 crore on overseas borrowings.
Exports contribute about 30% of sales for SFL and while there are signals of recovery in the overseas markets, it’s still heavy going. Also, the dollar has been weakening. Assuming a 2% drop in the dollar value, SFL’s profits could be impacted by around Rs5-10 crore at the present turnover level. Of course, company officials say that a judicious level of imports (raw materials) could help reduce the negative impact. Also, it may be a while before the firm reaches peak utilization. “In volume terms, we are about 35-40% away from the peak level of FY09,” says SFL president (finance) V.G. Jagannathan.
Much depends on whether the current momentum is sustained in the months ahead. Meanwhile, new capacities at Uttarakhand and Chennai could bring in tax savings as they go onstream around Q4 FY10. The new plant at Hosur, which will supply parts for Maruti engines, will bring in higher revenue and tax savings from next year. At a projected earnings per share of around Rs4 for this fiscal, the current price of Rs37 discounts current earnings about nine times. Analysts reckon that SFL is a sound play to ride the auto recovery, given its strong management and customer line-up.