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Riding high on the automobile sector wave...

Apr 29, 2000

Financial Year 2000 was a good year for the automobile sector as sales picked up in all segments except for scooters which saw a decline in sales. This in turn benefited auto ancillary players like Sundaram Clayton (SC). SC which depends on commercial vehicle sales growth, saw a robust growth in its bottomline in financial year 2000 as a result of this pick up. SCL's presence in the auto ancillary segment is in two businesses namely hydraulic brake actuator systems and its foundry division.

Its major clients in the hydraulic brake actuator systems are Telco and Ashok Leyland. These two companies together accounted for over 85 percent of sales of SCL's brake actuator division in financial year 2000. The demand was healthy as sales of commercial vehicles segment reported a growth of 22 percent YoY for financial year 2000. The overall number of units sold for the commercial vehicle segment went upto 1,71,000 units in financial year 2000 from 1,39,000 units in financial year 99. Specifically for Telco and Ashok Leyland the growth in commercial vehicles has been higher at 36 percent YoY and 40 percent YoY respectively for financial year 2000.

Its foundry division has also performed well over the past year. The company's major clients in the past have been TVS Suzuki, Maruti Udyog, and TVS Lucas. However it has managed to increase volumes of castings during the year as it has added new customers like Tata Cummins, Hyundai and Ford India Ltd. The foundry division's turnover and profitability over the last two years has gone up substantially due to orders placed by these global passenger car players. The foundry division accounted for 13 percent of sales in financial year 2000. The entry of international car manufacturers in India has increased the volume of business for most auto component makers in India and hence SCL is no exception.

As margins are low in the foundry business the company has been increasing its sales by augmenting its capacity. As new players are entering the passenger car market, hence to increase its casting volumes SCL has had to upgrade and expand its foundry capacity to take advantage of this boom in the passenger car segment.

Sales to OEM (Original Equipment Manufacturer) have improved in financial year 2000 by the automobile component industry and have grown by approximately by 40 percent YoY as per industry sources. The replacement market saw an overall growth of 11 percent YoY in financial year 2000. For SCL, OEM sales accounted for 70 percent of its total sales and replacement sales accounted for 30 percent of the sales in financial year 2000. The main demand continues to come from the OEM segment as global players in all vehicle segments are gaining entry into India and vehicle population is picking up. Going forward the replacement market should see an improvement in volumes as vehicle population should go up post 2003, as imports of vehicles will be allowed then.

The business prospects of SCL looks attractive for the next two to three years as the automobile industry has picked up. SCL's own strategy to improve performance further is to reduce its interest costs in future to improve its margins. SCL's capital expenditure in financial year 99 and 2000 was met out of internal accruals and not by increasing its borrowings as it is aims to be a zero debt company. The company had planned an investment of Rs 270 m for upgrading its manufacturing process and expansion of its foundry capacity.

(Rs m) FY1999 FY2000 Change
Sales 1,600 2,317 44.8%
Other Income 132 143 8.3%
Expenditure 1,463 2,070 41.4%
Operating Profit (EBDIT) 137 247 81.1%
Operating Profit Margin (%) 9% 11%
Interest - 11 -
Depreciation 58 79 36.2%
Profit before Tax 211 300 42.4%
Other Adjustments - - -
Tax 53 73 39.0%
Profit after Tax/(Loss) 158 227 43.5%
Net profit margin (%) 9.9% 9.8%

Exports as a percentage of sales for SC have been steady at 2.6 percent in the past two financial years. In the export market SC has been concentrating only on replacement demand. It has been exporting to countries where mainly Telco and Ashok Leyland have a presence.

For analysing SCL's performance besides tracking commercial vehicles sales growth it is important to look at the prospects in the motorcycle industry too. This is because SCL has a 9 percent stake in its associate TVS Suzuki. The brighter side of this is the substantial market value of SCL's investments in its group companies namely TVS Suzuki and TVS Electronics.

TVS Suzuki, SCL's associate company manufactures mopeds, motorcycles and scooters. The motorcycle industry has been performing well and this accounted for 53 percent of TVS's sales in financial year 99. Scooters on the other hand contributed to only 14 percent of the sales of the company while mopeds contributed to 26 percent of the company's sales. Inspite of the overall scooter industry sales declining by 4.1 percent for the first eleven months of financial year 2000, TVS Suzuki bucked the trend by reporting a growth of 27 percent YoY during this period, though on a lower base as it introduced many new models and upgraded existing products. This was commendable as compared to industry majors like Bajaj and LML which reported a decline of 8 percent and 13 percent respectively for the same period. Hence TVS's strategy of introducing new variants paid off. Inspite of good volume growth TVS's net profit growth in financial year 2000 was only 6.6 percent, due to higher marketing costs.

The market value per share of SCL in TVS Suzuki and TVS Electronics works out to Rs 107 ( as per the current share prices). If we strip out the value of these investments in the company, Sundaram Clayton's share price which stands at Rs 198 currently is actually valued by the market at Rs 91. As these investments are strategic ones it is unlikely that SCL will liquidate them.

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