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Asahi India: A sub-par performance! - Views on News from Equitymaster

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Asahi India: A sub-par performance!

Jul 28, 2006

Performance Summary
Asahi India, country’s largest automotive glass manufacturer has had a poor start to FY07. Cost pressures and higher interest outgo have resulted into a 70% dip in bottomline. Operating margins have contracted by a significant 510 basis points and profits have declined by 15%. Topline has, however, shown a 12% jump over 1QFY06.

Financial performance: Standalone snapshot
(Rs m) 1QFY06 1QFY07 Change
Net sales 1,538 1,728 12.4%
Expenditure 1,217 1,455 19.6%
Operating profit (EBDITA) 321 273 -15.1%
EBDITA margin (%) 20.9% 15.8%  
Other income 11 9 -19.7%
Interest (net) (23) (63) 173.0%
Depreciation 133 138 3.6%
Profit before tax 176 81 -54.1%
Extraordinary income/(expense) 6 (3)  
Tax 18 28 57.9%
Profit after tax/(loss) 164 50 -69.6%
Net profit margin (%) 10.7% 2.9%  
No. of shares (m) 80.0 159.9  
Diluted earnings per share (Rs)* 4.1 1.2  
Price to earnings ratio (x)**   17.3  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
From being a sole supplier to Maruti Udyog, the company has come a long way to emerge as a leading glass company in the country. It has around 85% market share in the automotive glass industry and 25% market share in the float glass industry. Recently, the company has entered into the architectural business in order to diversify its business model. For this purpose, it has incorporated a wholly-owned subsidiary, AIS Glass Solutions. This subsidiary will act as a front-end for its foray in architectural glass process and rendering services. Labroo family, Asahi Glass (Japan) and Maruti Udyog are the promoters of Asahi India.

What has driven performance in 1QFY07?

Segmental break up…
  1QFY06 1QFY07 % change
Automotive glass  
Revenues 933 1,067 14.4%
PBIT 141 142 0.4%
% of revenues 15.2% 13.3%  
Float glass  
Revenues 684 622 -9.1%
PBIT 68 55 -18.7%
% of revenues 10.0% 8.9%  
Revenues 7 94 1157.9%
PBIT (11) (7) N.A.
% of revenues N.A. N.A  

The growth in the company’s topline was driven by a 14% rise in the revenues of the automotive glass business. This segment dovetails the auto industry and as such, was able to take advantage of the 20% YoY growth in volumes that was witnessed in the sector during 1QFY07. PBIT margins for the segment came under pressure and contracted by 190 basis points. It looks like on account of low bargaining power, the company was unable to pass on the price hike on the input side to its OEM customers.

Among the other segments, its float glass division has performed below expectations, as its revenues declined by 9% on a YoY basis. The damage accentuated at the PBIT levels, as margins shrunk by 110 basis points, resulting in a 19% fall in profits. Here again, bigger drop in PBIT than topline meant that it has faced pressures on the cost front and was unable to pass it on. We believe once the effects of vertical integration kick in, where the company would source most of its glass requirement internally, margins might improve from the current levels. Other segments witnessed about 13 fold jump in revenues albeit on a lower base. Despite that, it continued to bleed at the profit levels and shaved off Rs 7 m from the total PBIT.

Thus, on account of margin pressure from all the segments, overall operating margins of the company fell by a substantial 510 basis points and profits reduced by 15% from 1QFY06 levels.

Cost break-up…
(Rs m) 1QFY06 1QFY07 Change
Raw materials 455 498 9.3%
% sales 29.6% 28.8%  
Staff cost 106 127 19.7%
% sales 6.9% 7.4%  
Power and fuel 247 318 28.5%
% sales 16.1% 18.4%  
Stores and spares consumed 110 106 -3.3%
% sales 7.1% 6.1%  
Other expenditure 298 407 36.4%
% sales 19.4% 23.5%  

High financial leverage hurts bottomline: On account of the company’s aggressive capex plans, the debt to equity ratio stood at 2.5 times during FY06, if one takes into account the interest bearing loans. The high level of debt coupled with rising interest rate environment has led to shooting up of the company’s net interest outgo by 173%. This coupled with a higher tax provisioning to the tune of 58% has put further pressure on an already depleted profit and have pushed the bottomline decline beyond 69% YoY.

What to expect?
At the current price of Rs 83, the stock is trading at a price to cash flow multiple of 6 times our estimated FY08 cash flow per share. The stock price has fallen around 23% since we gave our buy recommendation in April 2006. Despite this, we believe that once the new plants come on stream, cost benefits will manifest themselves in the form of improved margins. Given the leadership position of the company and relative under penetration of the Indian market, topline growth will also continue to be robust. The risk, however, is on the higher side.

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