The Hindu Business Line : LGB confident of improved margins

Coimbatore, June 5 The auto component industry is facing a tough time, caught between rising input costs and pressure on margins due to inability to pass on the entire cost increase to end users. A case in point is L.G. Balakrishnan & Bros Ltd, the Coimbatore-based automotive chain manufacturer that has seen its operating profit margin remaining stagnant at 2005 levels despite the turnover going up from about Rs 408 crore in 2004-05 to Rs 550 crore in 2007-08.

Mr B. Vijayakumar, Managing Director, LGB & Bros, shares his thoughts on the direction the industry will take and how he plans to take the company forward. Excerpts.

Though LGB had seen a sharp jump in turnover in 2007-08 compared to the previous year, the expenditure had gone up steeply while the net profit and operating profit margin have declined. Why?

All input costs have gone up while compensation is slow in coming. It will take time for compensation to come to the level of input prices. When input prices go up, it is a one step measure with our raw material suppliers hiking the rates to us. But when component producers talk of an increase in product prices, it is right up to the end of tier I manufacturers and involves four steps — retailer, end manufacturer, tier I and then us and it takes four times longer (to get a price hike). The entire increase also could not be passed on and after increased efficiency, our customers say that you could do it immediately. If we can’t reach that efficiency, we lose our profit.

I have to accept that our profits are lower because we could not reach the level of efficiency desired by our customers. It is taking us longer. Forging, metal forming and fine blanking operations, where the margins are tight, serve four-wheeler manufacturers, whereas timing chain provides us with slightly better margins. In the two-wheeler segment, the margins are low but the volumes are very high.

Are you trying to re-jig the product mix to earn higher revenue?

We are only trying at efficiencies right down the end. Anyone who does not have quality and efficiency will not survive. The fact that we have survived till now and continue to make some profit shows that we have the quality and efficiency. We have to aim at zero ppm (parts per million). Today at various operations, we are at various levels. From 100 ppm now we want to cut it to 50 ppm next year and to zero ppm year after that.

In terms of percentage, how much has your input cost gone up?

Input cost constitutes roughly 45 to 50 per cent of our turnover. That has gone up by 15-20 per cent.

How much of that have you been able to pass on?

About 10 per cent.

Will you have to absorb the rest?

We will have to absorb about 5 per cent. We will be able to get the remaining difference in cost increase over the next 6 months. It takes a long time to get a price increase. We will be able to get the difference in the current year. We are negotiating with our buyers, it is an on going process. It never stops! Now with the increase in fuel costs we have to go again for increases because travel costs, freight costs, etc all would go up.

Do the buyers hold the threat of looking for alternative suppliers if you insist on price hike?

Do the alternative suppliers have something that we don’t have? They also face the same problems. Buyers are generally reasonable people.

Your operating profit margin has come down from 17.73 per cent in 2006-07 to 13.65 per cent in 07-08. Do you expect to recover part of the lost ground in the current year?

We will try to recover it. If we can’t we have to find ways of negating it by coming up with better ways of manufacturing. We have to get more efficient or increase the volume to divide the overheads further. We have been doing that for the last 10 years to tide over the increase in input costs. We are doing that now also but the increases this time are very high. We cannot increase our volume further unless we make sizable investment. We are still looking at how to do things better, where to reduce costs.

Will you be able to repeat last year’s performance when your turnover jumped by about Rs 75 crore?

I can only answer as a group since the forging division, that contributed roughly 20 per cent of the turnover, has been demerged. We will maintain the same turnover and will maintain certain amount of growth. We will make a capex of about Rs 20-Rs 25 crore which is about 40 per cent of last year’s capex.

How do you see the future growth of the auto component industry in the country with so many mergers and acquisitions taking place?

For the next 10 years, you would find the margins being squeezed in all industries. Multiplication of capacities is one reason and what happened in textiles would happen in other industries too. Ultimately, the strongest companies would survive and there would be a series of M&A and rearranging of capacities on a global scale. It is good that Indian companies are buying companies abroad.

There would be foreign companies buying Indian companies and we have to learn to bite the bullet and live with low margins. The capital scenario would have to reflect this trend and people could not go for short term loans with 3-4 year repayment period but go for an 8-year repayment period and accordingly, the interest costs would have to come down. All this will happen in the future.

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