Asahi India Safety Glass: Sell

Recommendation: Sell

B. Krishnakumar

Given the sharp rise in value in the recent weeks and the possibility of a slowdown in growth and pressure on profitability, holders of Asahi India Safety Glass stock could trim exposures in the company and contemplate re-entry at lower levels later.

In a technical-cum-financial collaboration with Asahi Glass Company of Japan, the company makes laminated and tempered glass, which are used as windshields, side- and rear-glass in automobiles. The company has a strong presence in the automobile industry with a market share in excess of 90 per cent in the original equipment (OE) segment.

Asahi India caters to the OE requirement of almost all the top auto-makers such as Ashok Leyland, Tata Engineering, and Swaraj Mazda. In the passenger car segment, the company is the single largest supplier to Maruti, while Ford, Hyundai and General Motors are its major clients.

Given the nature of the product, the company derives a bulk of its revenues from the original equipment segment. Its fortunes are linked closely to the performance of the automobile industry. The output of commercial vehicles and passenger cars has a direct impact on Asahi India's financials.

Given this backdrop, it is not surprising to note the depressed performance by the company in 1997-98 and 1998-99, when the automobile industry was in bad shape. Moreover, burgeoning interest costs on account of the decision to fund capacity expansion plans through debt funds have also brought pressure on profitability.

However, the phenomenal growth in the automobile sector since January 1999 had a positive impact on the company's performance. For the year-ended March 2000, Asahi India reported a 42 per cent rise in the net profit to Rs. 220.03 crores, while the post-tax earnings rose sharply to Rs. 9.33 crores from Rs. 2.45 crores. On the equity base of Rs. 3.70 crores, the per share earnings works out to Rs. 25.22.

The company has also initiated efforts to broadbase its customer profile. It has shifted focus to the replacement and export markets in recent years. Besides, the efforts taken towards cost-cutting and indigenisation have resulted in a steady decline in the import content in the raw material mix.

After a sharp growth in 1999-2000, the company's performance this fiscal could be under pressure if the recent developments are any indication. The decline in Maruti's passenger car output should be a major worry for Asahi India.

The recent depreciation of the rupee vis-a-vis the dollar is also a cause of concern as Asahi India is a net foreign exchange user. Any adverse development in the forex market would, therefore, impact on the performance. However, the recent thrust towards exports and the steady decline in the import content would reduce the impact of the rupee depreciation.

In the meantime, the recent aggressiveness of Sekruit Saint Gobain could have long-term implications for Asahi India. So far, there has been no serious competition to Asahi India. However, the change of ownership is likely to make Sekruit Saint Gobain (formerly called Maharashtra Glass) more aggressive in the domestic market.

Though Asahi India would continue to enjoy the preferred supplier status with the present OE clientele, Sekruit Saint Gobain's success would definitely be at the expense of Asahi, which has a near-monopoly status in the OE segment. Given the sharp run up in price in the recent weeks, shareholders could book profit. Given the technical-cum-financial strength, fresh exposures may be contemplated on declines.