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Sundram Fasteners: Needs to tighten its screws - Outside View
 
 
Sundram Fasteners: Needs to tighten its screws

What's in a name?

The most unique aspect of this group is that some of the group companies are named Sundram (without the letter A after the letter D) and yet others as Sundaram (with the A after the D), though the founder's name is spelt as T.V. Sundram Iyengar on the parent company website. And, Sundram Fasteners in its latest annual report spells T.V. 'Sundram' Iyengar both ways on the same page! There appears to be a lot of confusion here, and besides, it is a nice way of paying homage to the group's founder.

Succession Planning

The 'top gun', Mr. Suresh Krishna, who at 74 is aging, has also made some tacky moves on the succession front. His second daughter, Arati, will hold the umbrella when he steps down and, Arundhati, who presumably is his elder daughter, is already well ensconced in the company. Together, the threesome earned a nice sinecure in salary and perks from the company in FY10. Okay, the TVS group has a 50% holding in the company to back up such moves - but talk about professionalism!

Forex gains or turnaround?

The company scraped the barrel in FY09 by recording the lowest pretax profit of Rs 223 m in the last decade. However, in FY10, the pre-tax profit bounced back to Rs 1.1 bn, the second highest in the last decade. How does that sound for a turnaround? But this feat was orchestrated by a magic wand - forex gains. In the preceding year, forex losses totted up to Rs 607 m. But, in the latest financial year, the forex gains amounted to Rs 105 m. That literally amounts to a turnaround in the bottom-line by Rs 712 m. And, for Sundram Fasteners, that is big moolah.

The directors' report harps on the inexorable rise in production costs which is eroding margins. This is standard fare in all annual reports. What the report is not saying is that the unit realization of its main production lines is also hemorrhaging. Automotive ancillaries by their very nature are at the receiving end of the business. It is the mother unit that decides the unit price that little sissy will get for what it sells to them. And, when the chips are down, they get hit both ways - on the price realization front, and on the duration of credit that they have to extend on sales. Add to it the inventory levels that they have to maintain, and the overall picture is not too rosy even in the best of times.

The bottom-line conundrum

There is another big reason too, why the company is not generating the operating profits that it should. Its investment portfolio of Rs 1.4 bn gives no revenue returns and that is a big negative hit. The bulk of this portfolio is in a rash of subsidiary units. However, where the bottom-line invariably gets a helping hand, is in the amount of interest on borrowings that is debited to the P&L account. In this specific instance, the amount of interest debited to the revenue account is substantially lower than the total interest paid during the year. The rest of the interest paid has obviously been capitalized.

It makes and sells multifarious items for the automotive industry, but the fasteners business is the company's meal ticket, as it accounts for over 40% of all sales. Together with pump assemblies, engine components, powder metal parts and, precision formed gears, they ring in 90% of all sales. Unit realization of fasteners and pump assemblies, which together accounted for 60% of all sales, fell in the latest year. This is inspite of a recovery in overall sales by the management's own admission.

Subsidiary emphasis

Operating in a low value added and highly competitive capital intensive industry is complicated enough - the gross fixed asset to turnover ratio is very marginal. But what pinches even more is the penchant to accelerate growth through the horizontal route. So Sundram Fasteners in its infinite wisdom has set up mainly 'teeny weeny' subsidiaries which cater to the developed markets, and equally 'teeny weeny' ones that cater to the developing markets. This move concurs with the management's studied viewpoint of going global at any cost, which is the current mantra of India Inc.

These subsidiaries are in addition to the 2 'investment' subsidiaries, which is de-rigueur for any Indian business house. (It has made full provision in the accounts for its equity investment in one of the investment subsidiaries). Whether such diversifications contribute to the wealth effect of the parent, is of course another matter. And, given Mr. Krishna's association with the Indian arm of the German Chamber of Commerce, three of his videshi units are of Teutonic stock.

And how are these offspring faring? Not too good thank you. Of the 11 subsidiaries, 9 appear to of the manufacturing variety. Seven of these are videshi types, including 3 German, 1 English, 1 Chinese, 1 Malaysian, and 1 American. Six of these have reported losses for the latest year end. Six of them also have net accumulated debit balances in their P&L account, which in simple English means, that their net worth is more than completely eroded. Collectively they trotted out a cash loss. Given this state of affairs, advances and loans to subsidiaries stood at a healthy Rs 393 m much of which is of the non interest bearing variety. These advances are not bound by any repayment schedules either! It can't get better, can it?

Remarkably enough, these subsidiaries are by and large of the standalone variety. That is to say, the parent has only minor inter-se transactions with them, either on the revenue account or on capital account, barring year end dues on both counts to the parent.

New Projects

Fortunately for the minority shareholders, the current emphasis on capex by the company is India centric with the value addition being generated within the country. It is setting up several units to cater to demands of the new generation vehicles, that heightened competition, is forcing manufacturers to build. But as is the current practice, the new units will also be captive to the mother units that they cater to, with the resultant consequences. There is really very little to commend this share.

Disclosure: Please note that I am a shareholder of this company

This column "Cool Hand Luke" is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
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2 Responses to "Sundram Fasteners: Needs to tighten its screws"

Ramana Kumar

Aug 23, 2010

Sad to read such a critical story on Sundaram Fasteners. Mr Suresh Krishna used to be a highly respected figure among Indian industrialists. In the early years of liberalisation, his drive to tap international markets from Indian manufacturing base used to be widely applauded. Other aspects of his management which drew admiration were personal integrity and excellent labor relations. Why have so many prominent South-based industrial groups fallen into obscurity ? (as another reader Mr Pradeep Kumar laments). It may be worthwhile to understand what has happened - it may help investors as well as other industrialists to avoid the same pitfalls.

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Pradeep Kumar

Aug 19, 2010

It TVS scions are selling land to generate cash , you can imagine the state of the hallowed group. Another example of the dinosaur bug which has caught the southern worthies. Funny, when history has turned in favour of South India and the coasts, the once mighty emperors seemed to be caught without clothes. You just have to think about the Sanmar Group, Murugappa group, Amalgamations and the truth will be apparent about their misfortunes. Alas, What a list of gems now not even worth their paper.

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Equitymaster requests your view! Post a comment on "Sundram Fasteners: Needs to tighten its screws". Click here!
 

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