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B. Krishnakumar

THERE are no signs of slowdown in the automobile production, which has been improving steadily since the third quarter of the previous fiscal. This has helped quite a few auto-ancillary companies, including Sundaram Brake Linings, to record a sharp growth in earnings in the past few quarters.

With Tata Engineering and Ashok Leyland reporting steady increase in commercial vehicle sales in the past two months, the performance of Sundaram Brake Linings is expected to improve further in the second half of this fiscal.

Taking into account the strong fundamentals, huge export earnings, and improved business environment, long-term investors could include Sundaram Brake Linings in their portfolio.

Sundaram Brake Linings is a major producer of friction material, consisting of brake linings, blocks, disc pads and clutch facings that are used in automobiles. Close to 50 per cent of the total turnover is accounted for by exports. In the domestic market, the company has a prominent presence in both the OE as well as replacement market of automobile industry. The OE segment accounts for about 28 per cent of the turnover.

While the company caters to almost all segments of the auto industry, it has a higher exposure to the commercial vehicles and tractor industry. To dilute the dependence on domestic automobile market, the company has actively tapped the export market. This has helped Sundaram Brake Linings tide over the slowdown in domestic automobile industry in the recent years.

The improvement in the domestic automobile production since the last quarter of the previous fiscal has had a positive impact on the financial performance of Sundaram Brake Linings.

For the year ended March 2002, the turnover rose 5 per cent to Rs 85.44 crore and post-tax earnings 12 per cent to Rs 5.97 crore. On the equity base of Rs 2.71 crore, the per share earning works out to Rs 21.99.

The sustained increase in domestic automobile production has helped the company record a sharp growth in earnings this fiscal. For the six months ended September 2002, the turnover increased 26 per cent to Rs 49.67 crore and the post-tax earnings almost doubled to Rs 3.51 crore from Rs 1.78 crore.

Taking into account the sustained increase in automobile production in the last couple of months, Sundaram Brake Linings' performance is expected to improve further in the second half of this fiscal.

The efforts taken to dilute the exposure to commercial vehicles segment should also help the company withstand the cyclical nature of commercial vehicle demand.

The thrust towards exports and the recent efforts to enhance the exposure to two- wheeler and passenger car markets would also help the company diversify its business risk.

From an investment perspective, strong fundamentals and a healthy dividend record are major positive features. On the other hand, the low equity base has affected liquidity in the counter.

The low equity base would also inhibit any significant institutional investor in the company. However, individual investors looking for long-term portfolio picks could contemplate equity exposure in Sundaram Brake Linings at the current price of Rs 160.

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