Expansions have helped Hinduja Foundries target new customers and geographies.
Hinduja Foundries (earlier known as Ennore Foundries), which makes automotive engine blocks, is expanding operations to cater to the demand in domestic and the export segments.
The company plans to increase its capacity by 53 per cent to 2.32 lakh tonnes per annum (tpa) by FY10. The first phase of the new expansion will see the capacity move up from 1.52 lakh tpa to 1.74 lakh tpa by FY09, which will be further enhanced to 2.32 lakh tpa.
These capacities, which include a second unit at Sriperumbudur, Tamil Nadu and a new unit in Hyderabad, will make Hinduja Foundries the sixth largest maker of automotive
casting in the world.
In September 2007, the company had commissioned an iron foundry in Sriperumbudur, which enhanced capacities from 1.02 lakh tpa to 1.52 tpa. With muted commercial vehicle sales, is further expansion of capacity justified?
Beyond traditional base
V Sankar, CFO, Hinduja Foundries says that the expansion of capacities by commercial vehicles manufacturers (Tata Motors, Ashok Leyland and others), the setting up of powertrain facilities in the country by foreign auto majors and the requirements of industrial engines sector will lead to robust demand for the company's engine blocks.
By 2010, auto makers are planning to increase their engine capacities by nearly 2 million units. While commercial vehicle sales account for 50 per cent of revenues (down from 80 per cent two years ago), passenger vehicles and tractors account for 45 per cent.
The company intends to increase share of industrial sales from 5 per cent to about 8 per cent over the next two years.
Expansion benefits
The demand, the company believes, will help in growing revenues by 40 per cent annually over the next two years since its capacities are booked for the next 18 months.
The economies of scale and efficiency in operations and increased automation at the Sriperumbudur plant is expected to boost margins.
Sankar believes that lower operational cost will improve operating margins from 10 per cent currently to 14 per cent. Exports of the company thus far have been insignificant as existing capacities have catered to domestic demand.
The company has earmarked 40 per cent of the production (30,000 tonnes per annum) at its Sriperambudur plant for exports. Its focus on exports is a geographical de-risking strategy to take care of any slowdown in the domestic market. While there will be no difference in pricing, margins from exports will be higher due to the DEPB license benefit that exporters typically enjoy.
Investment rationale
While sales for the quarter ended December were up marginally y-o-y, net profit was down 77 per cent y-o-y due to higher depreciation and interest costs on the first unit at Sriperumbudur.
The company believes that over the next two years, the topline and operating profit will move up significantly. At Rs 143, the stock is trading at 12.3 times its fully diluted FY09 earnings of Rs 11.6 and, considering demand for its products it should be able to grow its business and generate about 30 per cent returns in a year.
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