Indo Matsushita Carbon Company: Hold

Recommendation: Hold

B. Krishnakumar

The existing shareholders could remain invested and use any price weaknesses to enhance exposures in the company.

The company is the largest manufacturer of carbon rods in India, a key component in the manufacture of dry-cell batteries. The company is the dominant player in the industry and its clientele includes dry cell majors such as Indo National, Lakhanpal National, Geep Industrial Syndicate and Eveready Industries.

Aided by the steady growth in demand and well-planned capacity expansion projects, the company has managed to capitalise on the growth in demand for its products. Apart from the strong presence in the domestic market, the company has a presence abroad also. It is a net foreign exchange earner with exports accounting for about 24 per cent of the total turnover for the year-ended March 2000.

For 1999-2000, the company's turnover improved 17 per cent to Rs. 43.42 crores and the post-tax earnings 18 per cent to Rs. 6.67 crores. On the equity base of Rs. 4.8 crores, the per share earnings works out to Rs. 13.90. The performance was affected in the previous fiscal by the sharp spurt in furnace oil prices.

To counter the rise in input costs, the company raised prices in April 2000. However, the recent depreciation of the rupee against the dollar and the sustained firm trend in crude price are causes of concern for Indo Matsushita. Though the company has an import content of about ** per cent in its raw material mix, the company is a net foreign exchange earner on account of significant contribution from exports.

However, the sustained firm trend in furnace oil price and the slowdown in the dry cell battery industry would cause a slowdown in growth rate for the company. Battery production in the first four months of this fiscal fell to 642 million pieces compared to 647 million pieces the previous year. As a result, the company's performance in the first half is likely to be, at best, flat. Moreover, the company also faces the threat of a slowdown in demand in the event of a pick up in demand for alkaline batteries. Carbon rods find application only in the traditional zinc chloride batteries; they are not used in the relatively high-cost alkaline batteries. However, the company's performance would be affected when the demand for alkaline batteries picks up.

Given that the company is likely to see a flat trend in performance in the first half of this fiscal, fresh exposures may be avoided for the time being. However, considering the strong fundamentals and the prominent position of the company in the industry, fresh exposures may be contemplated on price weakness.