Motor Industries Company: Sell

Recommendation: Sell

B. Krishnakumar

THE STOCK market sentiment continues to be shadowed by domestic and international developments. In the domestic front, there is still no evidence of a pick up in the automobile production or improvement in other spheres of economic activity.

Globally, the two largest economies of the world, that of the US and Japan, are passing through a major slowdown across various sectors. As a result, there has been a sharp decline in market capitalisation across all major stock markets of the world.

Given the subdued stock market trend and the negative trend in automobile production, it would be safer to use the price rally to reduce exposures in auto ancillary companies. The Motor Industries Company (MICO) is one such company which would report a subdued trend in performance. Shareholders could use price uptrends to scale down exposures in the company.

A subsidiary of German major, Robert Bosch GmbH, MICO is a major producer of fuel injection systems. Though the company is better identified as a producer of spark plugs, a major chunk of the revenues accrues from the fuel injection systems. Close to 70 per cent of its revenues accrues from the fuel injection systems which find application primarily in the diesel driven automobiles and tractors. Spark plugs, automobile lamps and batteries are the other major contributors to the revenue stream. Both the original equipment (OE) segment and the replacement market account for 45 per cent to the turnover, while the remaining 10 per cent of the earnings accrues from exports.

Given the nature of products manufactured, the company's performance is influenced to a major extent by automobile production. After passing through a rough patch in 1997-1999, automobile production has seen some recovery since January 1999. As a result, MICO managed to post a sharp recovery in performance for the year ended December 1999.

Aided by the growth in automobile production and the flow of revenues from the replacement market, the improved performance was sustained in the six months ended June 2000. For this period, MICO's turnover increased by about 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.

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However, the production of automobiles in general, and commercial vehicles in particular, has seen a sharp slowdown since the quarter ended June 2000. This apart, the tractor industry is also in the midst of a slowdown that is likely to affect the performance of MICO. Though the latest Union Budget has extended sops to the commercial vehicles industry by way of accelerated depreciation, the overall sluggishness in economic growth and industrial activity would inhibit any significant growth in automobile production.

Meanwhile, MICO has completed two rounds of share buy-back. After an initial offer at Rs 4,200 a share, the company completed the second round in late 2000. The offer price for the second tranche of buy-back was pegged at Rs 3,800 a share. Considering the strong financials and ultra-conservative accounting and income distribution policies, further buy-backs could be expected from the company.

From an investment perspective, the company's share price has seen a subdued trend in recent months. Taking into account the expectation of a subdued trend in performance, at least in the near term, the share price of MICO is unlikely to increase significantly. Shareholders could therefore look for opportunities to reduce holdings in the company. However, taking into account the long term prospects and strong fundamentals, fresh buying may be contemplated on price declines. An evidence of improvement in automobile production could also be used to expand holdings in the company.