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Asahi India: FY06 result update

Jun 16, 2006

Performance summary
India’s largest glass company, Asahi India announced lacklustre results for the fiscal year ended March 2006. While the topline for FY06 was flat on a YoY basis, net profit (excluding extraordinary items) declined by a sharp 25.2%. The company’s performance during the fiscal was significantly affected by the closure of its Taloja plant due to floods. The erosion in profitability was further aggravated by higher depreciation and interest expense incurred in view of its capex plans. The performance during 4QFY06 was however mixed, with sales remaining almost flat at 4QFY05 levels and net profit (excluding extraordinary items) registering a growth of 30% YoY (primarily aided by the decline in depreciation expense). The board has recommended a dividend of Rs. 0.6 per share (dividend yield of 0.8%).

Financial performance: Standalone results
(Rs m) 4QFY05 4FY06 Change FY05 FY06 Change
Net Sales 1,568 1,578 0.7% 5,887 5,877 -0.2%
Expenditure 1,251 1,236 -1.3% 4,673 4,704 0.6%
Operating Profit (EBDITA) 317 343 8.2% 1,213 1,173 -3.3%
EBITDA margin (%) 20.2% 21.7%   20.6% 20.0%  
Other income 46 21 -54.3% 74 36 -50.7%
Interest 19 36 95.1% 32 108 243.0%
Depreciation 112 30 -73.1% 403 464 15.0%
Profit before tax 231 297 28.5% 853 637 -25.3%
Extraordinary items - 397   - 276  
Tax 19 24 28.5% 68 50 -26.7%
Profit after Tax 212 670 215.5% 785 864 10.1%
Prior period items (3) (1) -76.8% (3) (1) -53.9%
Net profit 210 670 219.4% 782 863 10.3%
Net profit margin (%) 13.4% 42.4%   13.3% 14.7%  
No. of Shares (m)         80.0  
Diluted earnings per share (Rs)*         11  
Price to earnings ratio (x)         7  
*Trailing 12 months            

What is the company’s business?
Asahi India is jointly promoted by Labroo family, Asahi Glass (Japan) and Maruti Udyog Ltd. The company is one of the leading manufacturers of float glass (prepared using float process as opposed to rolled process, an obsolete technique which produces sheet glass) in India with a market share of 25%. The company’s business can be primarily divided into float glass, automotive glass (prepared using float glass) and architectural glass solutions business (provides one-stop-shop glass solutions by adding value to float glass like tempering and laminating). In the automotive business, Asahi India is the largest supplier to the Indian car passenger industry, with a market share of 85% (in volume terms) in the OEM segment and a 55% share (in value terms) in the replacement market. The total production capacity at end of FY06 stood at 2.5 million car sets for the automotive segment and 500 TPD (tonnes per day) for the float glass business. The float glass capacity will increase to 1,200 TPD when the Roorkee plant commences production (December 2006).

What has driven business in FY06?
Revenue momentum falters: In FY06, the float glass segment witnessed an 18.4% YoY decline in revenues, as the Taloja plant (the only plant that caters to the float glass business) was shut for over three months on account of floods. The automotive segment, however, recorded a 12.6% growth in sales as compared to an increase of 17.7% in FY05. The decline in growth momentum for the automotive segment was due to the sluggish growth witnessed in the Indian passenger car industry, which grew at a moderate rate of 6% in FY06 (compared to 24% in FY05). We believe that the decline in revenues in FY06 is a blip, which the company will recoup in FY07. Besides the auto segment, we are excited about the opportunities in the architectural glass segment over the long-term. It has to be remembered that the company is the third largest player in this segment and the scope for market share exists. As per the company, topline growth is likely to be in the vicinity of 15% to 18% over the next two to three years.

Margins under pressure: Asahi reported a 3.3% YoY fall in its operating profit in FY06. The pressure on operating margins was on account of higher material and staff cost, which as a percentage of sales, increased by 0.3% and 0.8% respectively (on a YoY basis). The impact of the increase in input prices on the margins, however, remained limited due to a significant change in sales mix (due to closure of the Taloja plant) in the favour of automotive segment. To put things in perspective, revenues from auto segment increased from 54.4% in FY05 to 61.9% in FY06, whereas revenue from float glass segment declined to 45.9% in FY05 to 38.1%.

(as a % of net sales) 4QFY05 4FY06 FY05 FY06
Material cost 30.3% 29.4% 30.9% 31.2%
Power fuel 13.3% 15.3% 14.8% 14.4%
Stores and spares 5.5% 5.1% 5.4% 6.0%
Staff cost 6.5% 7.6% 6.5% 7.3%
Other expenditure 23.8% 21.8% 21.7% 20.7%

While margins in the auto business were maintained at 23%, margins for float glass business declined to 15% in FY06 (20% in FY05). It should be noted that Indian float glass industry is currently in midst of an overcapacity situation (expected to continue for the next two years) and hence, margins will be under pressure in wake of rising input costs and declining prices. The strategy of the company, going forward, is to increase in-house consumption of float-glass by expanding its glass solution business (margins at around 30%) and thereby protects its margins.

Extraordinary items rescue bottomline: During the fiscal, Asahi changed its depreciation method from SLM to WDV for its ‘Auto SBU’ with a retrospective effect. This led to depreciation write back of Rs 401 m in FY06 and 4QFY06. As a result, despite higher interest expenses and lower other income, the company was able to clock a 10.3% YoY growth in its bottomline for the fiscal.

Consolidated snapshot: The consolidated revenues of Asahi include the numbers of Asahi Glass Solutions Ltd, its glass solutions subsidiary. The performance at the consolidated levels for FY06 was similar to the standalone results, with the topline registering a marginal growth of 0.4% YoY and bottomline rising by 11%.

Consolidated numbers
(Rs m) FY05 FY06 Change
Net Sales 5,887 5,912 0.4%
Expenditure 4,683 4,722 0.8%
Operating Profit (EBDITA) 1,204 1,190 -1.1%
EBITDA margin (%) 20.4% 20.1%  
Other income 74 37 -50.0%
Interest 32 109 245.4%
Depreciation 404 466 15.2%
Profit before tax 842 653 -22.5%
Extraordinary items - 250  
Tax 68 50 -26.7%
Profit after Tax 774 853 10.1%
Prior period items (3) (1) -53.9%
Share in profit of associates 1 5 400.0%
Net profit 772 857 11.0%
Net profit margin (%) 13.1% 14.5%  
No. of Shares (m)   80.0  
Diluted earnings per share (Rs)*   11.0  
Price to earnings ratio (x)   7  
*Trailing 12 months      

What to expect?
Going forward, the company intends to tap the lucrative value-added market through its subsidiary Asahi Glass Solutions Ltd. Towards this, as mentioned earlier, it is setting up an integrated glass plant at Roorkee (capacity of 700 TPD), which will be operational by December 2006. The strategy to increase presence in the value-added market would boost realizations going forward, which consequently will act as a cushion at the operating margin level (we believe that the scope to improve EBIT margins in the automotive segment is limited). This augurs well for the company as in a situation of depressed market for float glasses (float glass being a commodity is more cyclical in nature), it will be able to consume its own glass and provide value added products – both in automotive and architectural markets. Also, this backward integration will save costs on the raw material front going forward.

At the current price of Rs 78, the stock trades at a price to earnings multiple of 7 times FY06 earnings. We believe that the growth prospects of Asahi India will be largely driven by domestic factors (unlike other auto ancillary companies that are largely export-oriented). While we expect slower growth in demand for automobiles going forward (passenger cars and CVs), the revenue driver will be the architectural segment in the next two to three years. The Asahi association (from a technology standpoint) is an added advantage. Overall, we are encouraged by the business prospects in the long-term.

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