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B. Krishnakumar

LONG-TERM investors may consider adding Rico Auto to their portfolio. Taking into account the company's prominent position in its industry and growing presence in the export market, the long-term prospects appears positive. The investment recommendation is subject to the following risks: Dependence on Hero Honda for revenues; any downturn or slowdown in domestic auto industry would have a direct bearing on the company; concerns on liquidity owing to relatively thin trading volume — on an average, about 2000 shares get traded every day.

Rico Auto is a major producer of aluminium and ferrous die-castings. Its product portfolio includes hub assembly, flange assembly, panel and clutch assembly. The company's clientele includes top global and Indian auto majors. Its products are used as original equipment fitting by top auto majors such as General Motors, Cummins, Ford and, in India, by Maruti, Hero Honda and Honda Motorcycles and Scooters.

The company now derives a chunk of its earnings (about 60 per cent) from Hero Honda. It has actively taken efforts to diversify its customer base. Rico Auto is making progress in the export market and it is increasingly being viewed as a preferred sourcing base by global auto majors. As a result, exports rose 41 per cent to 16.4 crore. This accounts for about 3 per cent of the total earnings from the core business. Given the nature of products manufactured, the original equipment market accounts for bulk of the revenues.

As a result, the company's earnings stream depends on trends in automobile production. The earnings growth in the recent years has been quite robust on account of the strong increase in automobile production during this period.

For the year-ended March 2004, turnover increased 32 per cent to Rs 598 crore. Post-tax earnings improved 50 per cent to Rs 29.8 crore. On the equity base of Rs 10.72 crore, the per share earnings works out to Rs 27.8. In the previous fiscal, the company sold its agro-products division for a sum of Rs 7.9 crore. The performance in the latest quarter would have been better but for the pressure on profitability arising from firm price of inputs.

Owing to the huge exposure to the original equipment market, the company may not always be in a position to pass on the impact of input cost rise by hiking product prices.

The expected pick-up in exports would be a key driver of growth. The continued growth in auto sector would also propel earnings from the domestic market. The company is also implementing capacity expansion projects that would place it in a position to cater to demand growth.

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