Financial Daily from THE HINDU group of publications
Sunday, Jul 11, 2004
Financial Daily from THE HINDU group of publications Sunday, Jul 11, 2004 |
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Investment World
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Stocks Markets - Recommendation Mico: Buy B. Krishnakumar
Riding on robust vehicle sales.
A 61 per cent subsidiary of the global major — Robert Bosch of Germany — Mico has presence across various product segments in the auto ancillary industry. Though better known for the spark-plugs used in two-wheelers, Mico's product range includes fuel-injection systems used in automotive diesel engines. It derives close to 40 per cent of the revenues from this product segment. Spark-plugs, car audio systems, power tools and auto electricals such as starter motors and alternators are the other major products. The company has been identified as a major sourcing base by its German parent. This has resulted in a strong growth in exports over the recent years. The company has presence in the original equipment and replacement markets of the automobile industry; it derives close to 25 per cent of earnings from the replacement market and 48 per cent from the original equipment segment. Mico has a major presence in the commercial vehicles and tractor segment. Taking into account the major exposure to original equipment market of the commercial vehicle and the tractor industry, the sharp improvement in performance in recent quarters is not at all surprising. The steady growth in commercial vehicles production and the recovery in the tractor industry have been the key drivers of growth. For the quarter ended March 2004, turnover rose 30 per cent to Rs 560 crore and the post-tax earnings more than doubled to Rs 112.4 crore (Rs 52.3 crore). Though the performance was boosted by an extraordinary income of Rs 20 crore, representing profit on sale of investments, the growth in profits would be at a healthy 76 per cent. The pick-up in exports, implementation of more stringent emission norms and the growing presence in auto electrical and passenger car segment would be the key drivers of growth. The implementation of more stringent emission control norms would drive the demand for Mico's flagship product — fuel injection systems. The focus on passenger car segment is another positive feature. The growing popularity of passenger cars with diesel engines, especially the ones sporting the CRDi technology, could open up new business potential for Mico. The company has initiated efforts to tap the growing potential from the segment. The strong balance-sheet and the technological backing of its German parent places Mico in a position to capitalise on such growth opportunities. The encouraging growth prospects for the two-wheeler industry would also keep the cash register ringing by virtue of rising demand for spark plugs.
The growing contribution from non-auto business and the steps taken to enhance exposure to the replacement market are major positive factors from a long-term perspective. The entry into such businesses as car servicing, packaging machines, power tools and car audio systems would reduce the company's dependence on the original equipment market of the domestic automotive industry. Taking into account these factors, long-term investors can consider taking equity stake in Mico. After the proposed stock split, the institutional investor interest and stock valuation are also likely to improve.
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