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Sunday, Sep 04, 2005

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Talbros Automotive Components: Invest at cut off

B. Krishnakumar

TAKING into account the fundamentals, the strong presence in the industry and the positive outlook, investment can be considered in Talbros Automotive Components at the cut-off price.

The company proposes to raise Rs 47.5 crore through a public offer of shares via the book-built route in the price band of Rs 90-102. The proceeds would be used to fund the expansion and diversification plans.

Talbros Automotive is the market leader in the gasket business. It is a major supplier in the original equipment market (OEM) with its clientele including auto majors such as Tata Motors, Ashok Leyland, Eicher, Mahindra and Mahindra and TAFE. It also supplies to the two-wheeler and industrial engines segment. The company derives the bulk of its earnings from the OEM segment.

The growth in automobile production has helped the company report improved performance in recent years. For the year ended March 2005, the revenues increased by 24 per cent to Rs 101.8 crore and post-tax earnings more than doubled to Rs 4.7 crore.

To cater to the growing demand, the company is expanding its gasket production capacity at its plants in Pune and Faridabad.

The company is also setting up a forgings unit that would cater mainly to the requirements of the QH Talbros, a group company.

Out of the proceeds of the public offer, Rs 4.8 crore would be invested in a new joint-venture company, Nippon Leakless Talbros, in which Nippon Leakless Corporation of Japan would hold a 60 per cent stake.

The joint venture entity would produce non-asbestos gaskets and cater to the Honda group of companies in India, including Hero Honda Motors and Honda Motorcycles and Scooters. The flip side to the agreement is that Talbros Automotive would cease to supply gaskets to the Honda group.

The phasing out of the business with the Hero group would happen over three years. This would result in a loss of revenue to Talbros over time. The revenue from the Hero group is about Rs 20 crore now.

As the phase-out of the Hero and Honda business would happen over a period, the performance of Talbros is unlikely to be affected when the joint venture unit gets full functional.

Besides, considering the clientele base, the contribution of the Honda group to the overall revenue stream is not likely to be significant.

The other crucial factor influencing growth prospects is the performance of the automobile industry. With close to 70 per cent of the earnings flowing from the OEM segemnt, a slowdown in automobile production would affect earnings growth.

The diversified clientele, the growing contribution from exports and the venture into forgings business would, however, act as a hedge to the gaskets business.

Considering all these factors, the growth prospects for Talbros appear encouraging. Strong fundamentals, entrenched position in the industry, and technical backing of global auto-ancillary majors are positives. Long-term investors may consider bids at the cut-ff price.

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