Motor Industries Company: Hold

Recommendation: Hold

B. Krishnakumar

A subsidiary of German major Robert Bosch GmbH, Mico is a brand that is synonymous with spark-plugs.

The company is also a major producer of fuel-injection systems, used primarily in the diesel engine driven automobiles and tractors. Also, the latest foreign passenger car models use such systems. These products account for over 60 per cent of the company's turnover.

Though the automobile industry went through a rough patch in 1997-1999, Mico managed to avoid taking a hit. This was possible because of its presence in the original equipment and replacement markets. The company derives about 45 per cent of its revenues from the two segments, the balance coming from exports.

The sustained rise in the commercial vehicles output since January 1999 had a positive impact on the company's performance, when it reported a post-tax earnings of Rs 105.78 crore.

The company's performance improved further in the first six months of this year. The turnover increased by 14 per cent to Rs 726.81 crore, while the post-tax earnings more than doubled to Rs 89.50 crore from Rs 23.40 crore.

However, the sharp growth in performance in the first six months is unlikely to be sustained in the second half. The sluggishness in commercial vehicles production in the last four months, coupled with the sharp slowdown in the tractor industry, is likely to affect Mico's performance.

The commissioning of a new plant in Jaipur in 1999 for making core products, including fuel-injection systems, places Mico in a position to cater to the anticipated growth in demand. Meanwhile, the company has decided to buy back about two lakh shares, representing 5.5 per cent of the capital base, at Rs 4,000 per share. Irrespective of this scheme, Mico is a good option by virtue of its sheer size and technical prowess in its area of operation.

From an investment perspective, the conservative accounting policies and low dividend payouts may have affected investor sentiment towards the Mico stock in terms of price-earnings multiples. Though the company's short-term performance could remain under pressure, it may graduate as a sound long-term portfolio candidate. Shareholders can remain invested, while long-term investors could use price weakness to build exposures in the stock.