The Samkrg Pistons stock that had earlier reacted well to the announcement of its first-half results but fell soon after has once again begun to look lively. There could be more than one factor at work here. First, it was being anticipated that growth rates would accelerate as its capacity constraints are being removed with a vengeance (the plants manufacturing both piston assemblies and piston rings on an average are operating at 100 per cent capacity utilisation). Second, there has been a move to improve the mix of buyers of its products thereby reducing its dependence on moped and other two-wheeler manufacturers. And thirdly, it should be understood that as indiscriminate imports of piston rings and assemblies were partly responsible in slowing down Samkrg's growth rates (to 20 per cent in the first-half) the possibility of imposing duties on imports now will help as the market for its products is expanding rapidly.The drop in sales and subsequently production of scooters and mopeds was felt late in1996. That eventually turned out to be the major reason why Samkrg could not grow at its normal rate in the first-half of the current year. The bulk of its supplies of piston rings and piston assemblies went mainly to moped manufacturers, a segment of the two-wheeler industry that performed the worst; a trend that continues even at the present. The fact that Samkrg was a major supplier to the leading names in the two-wheeler industry such as TVS Suzuki, Bajaj Auto, Hero Honda and LML did little to reassure its shareholders. Now the company will be supplying components to the motorcycle manufacturers as well but based on long-term contracts and should be better off to that extent as volumes and margins should be stable.
Even though the bulk of its sales went to a sector that has been underperforming the company had developed other avenues for generating revenues; supplying components to stationary engine manufacturers like Greaves, Kirloskar Oil Engines and Birla Yamaha besides beginning to supply to theexport market. In addition, piston rings and piston assemblies will also be supplied to passenger car and LCV manufacturers, such as M&M and Maruti Udyog.
The change in strategy should begin to payoff from the second-half of the current year, as its expanded capacities have already come on stream. In addition to that there are capacities coming up that will cater to the export market and to the domestic replacement market that to a great extent was being catered to by imported products. Despite being a relative newcomer to the business with huge and continuous capacity expansions Samkrg managed to earn a return on capital of 22.5 per cent during 1996-97. But the return on incremental capital seemed to be the most impressive at 60 per cent.
Samkrg does seem to be able to squeeze a little extra out of its assets and generates a high return on equity of 29 per cent. This has been brought about due to its strategy of funding the substantial additions to its manufacturing capacities through internal accrualsand lots of debt (giving it a debt equity ratio of 1.3:1) making it both aggressive and a little risky at the same time. And this strategy has been so effective in the recent past (companies like MRF have done this for a number of years quite successfully) that this capital structure will continue to be used to fund their capacity additions in the future. To quote from its most recent (1996-97) annual report "The company plans to establish a capacity of 2 million piston assemblies during the year 1997-98. To meet the export and replacement market the company is further planning to expand capacity of piston assemblies to 3 million at both the plants with its internal accruals and loans from financial institutions." In addition it will have an eventual capacity for piston rings of 10 million.
Despite the aggressive growth shown and the promise of more to come; and the requirement of funds to reinvest, shareholders have been suitably rewarded with a dividend payout aggregating 31 per cent of its net earningsfor each of the last two years. Its financial performance in a year showing signs of fatigue has been better than the average for component manufacturers but the stock reflects poorly on what has been achieved so far.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
