The Hindu Business Line : Ennore Foundries: Invest

TAKING into account the positive outlook for the automobile industry and the attractive offer price of Rs 60 (market price Rs 178), investors can subscribe to the rights offer of Ennore Foundries.

The company makes iron and aluminium casting products such as cylinder block and heads that are used in the automobile industry. It has a captive consumer in Ashok Leyland, which holds a 21 per cent equity stake and accounts for over 60 per cent of the turnover.

Apart from Ashok Leyland, Ennore Foundries is an original equipment supplier to other auto majors such as Hyundai Motors, Maruti Udyog and Mahindra and Mahindra. Though the company has an exposure to the engineering sector, bulk of the earnings accrues from the automobile industry.

The company's financial performance is linked to the fortunes of the automobile sector, Ashok Leyland in particular.

Aided by the increased automobile production, Ennore Foundries' performance has improved in recent years.

From a loss of Rs 16.6 crore in 2002-03, the company posted a net profit of Rs 13 crore for the year-ended March 2005.

The capacity utilisation also improved steadily to about 87 per cent for 2004-05. With the automobile industry scheduled to grow at a fair pace, the company's performance is likely to grow over the next few quarters.

To cater to the demand growth, the company plans to set up a new foundry unit in Chennai.

Ennore Foundries has recently acquired a ductile casting unit from Ashok Leyland and is also modernising the existing facilities.

To part-finance these projects, the company is offering shares on a rights basis, in the ratio of 14 shares for every 10 shares held, at a premium of Rs 50 per share.

The offer closes on August 9 and the company plans to raise Rs 57 crore through it.

Investors, however, need to take cognisance of the following risk factors from a long-term perspective:

The company operates in an industry where volume growth is the key driver of earnings with the scope for expansion in profitability being minimal. Being a volume-driven business, a slowdown in the automobile production would affect the company's prospects.

The dependence on Ashok Leyland for the bulk of the business volume is another key factor.

Though the company plans to tap the export market, it may take it quite a while to establish a presence. Moreover, the new project is also likely to go on stream only by March 2007.

The castings industry is raw material intensive in nature. With limited scope for revision of product prices, any increase in the prices of key raw materials such as pig iron or steel scrap would impact profitability.

Taking into account these factors, shareholderscan pare exposure on the evidence of a slowdown in the automobile sector.

Risk-averse investors can, however, subscribe to the rights offer and offload at least a portion of the existing holdings in the secondary market.

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