Steering ahead

General Motors' bulk order to drive Sona Koyo exports

Sona Koyo's 50,000-steering wheel order from General Motors India will help it increase exports, which is what the company has been aiming to do.

The value of the contract is not known, but even if it is not very large, the deal should help open doors for Sona Koyo for similar contracts. Sona Koyo hopes to earn nearly half of its revenues from overseas markets by 2010. At present, exports account for 13 per cent of its top line.

At home, Sona's operating margins have been deteriorating. In the first quarter of 2005-06, operating margin stood at 9.4 per cent, and improved slightly in the second quarter to 10.8 per cent, but both were lower than previous periods.

In 2005-06, its margins should be around 11.2 per cent, a fall from 12 per cent in 2004-05. With growth in the passenger car industry slowing down, the company's sales could be impacted given that around 45 per cent of its domestic revenues are from Maruti. Moreover with a new Rs 35 crore plant coming up, finances could be under pressure.

The Sona Koyo stock has been an underperformer in recent times: between September and November, just prior to the announcement of the GM order, the stock had fallen 8 per cent compared with a 14 per cent rise in the Sensex. The stock moved 15 per cent on Monday to Rs 74 on the news of the order.

At the current price of Rs 72.65, the stock trades at 18.6 times estimated 2005-06 earnings and around 16.5 times estimated 2006-07 earnings.

Given that the earnings are likely to grow at a CAGR of around 15 per cent in the next couple of years, unless exports rev up, the stock appears expensive.

Mirc Electronics: Staying put

Despite severe competition in the television market, especially from Korean players, Mirc Electronics has managed to improve its operating profit margin by 23 basis points to 8.5 per cent in the September quarter.

Analysts say realisations per unit sold have fallen about 12-15 per cent in the September quarter on a y-o-y basis in the company's key product segment""flat televisions.

To offset weaker realisations, the company is understood to have focused on expanding unit sales of flat televisions. A further cushion to the margin has come about by lower costs of key inputs such as picture tubes in the last few months because of a build-up of inventories globally.

These steps helped the company's operating profit expand faster than growth in net sales in the September quarter over September 2004 quarter "" operating profit expanded 24.42 per cent to Rs 26.9 crore against a growth of 21.1 per cent in net sales to Rs 316.47 crore.

The Mirc Electronics stock has, however, under-performed the Sensex over the past two months, given investors' fears of Korean players grabbing a larger share of the market. The stock has fallen about 6 per cent compared with a 3.8 per cent gain in the broader market.

Group company Onida Savak, a washing machine manufacturer, will merge with Mirc once the legal and regulatory formalities are completed.

With contributions from Shobhana Subramanian and Amriteshwar Mathur