ucal research report

Text:

SEPTEMBER 05, 2003

India Equity Research

Ucal Fuel Systems

Ucal Fuel Systems

September 05, 2003 Page 2 of 6

Background

Incorporated in 1985, Ucal Fuel Systems Ltd. (UFSL) was

jointly promoted by Carburettors India (holding 23.3% stake),

a pioneer in the manufacture of Carburettors and Fuel Pumps

in India and Mikuni Corporation, Japan, (holding 26% stake).

IFC, Washington, also holds 11.5% stake in the company

capital.

UFSL has technical and financial collaboration with Mikuni

Corporation, Japan. It also has buy back agreement with the

collaborator for exporting their products. Its relationship with

Mikuni Corporation, Japan, has strengthened over the years

and the flow of technology from the collaborator is smooth.

Mikuni Corporation has assured the company that it will

continue to transfer technology to the company in future.

UFSL initially started with manufacturing of Carburettors for

passenger cars manufactured by Maruti Udyog and it

subsequently added to the manufacturing line, Carburettors

for two wheelers manufactured by TVS Motor Company. In

addition, the company is now supplying, fuel injection related

products to Hyundai Motor India and MUL.

The company supplies Multi Point Fuel injection Related parts

such as Throttle Body, Delivery Pipe, Pressure Regulator and

Fuel Filter to Maruti Udyog and Hyundai Motor India. In the

two-wheeler segment the company supplies Carburettors to

all the leading manufacturers like Bajaj Auto, TVS Motor

Company, Yamaha Motor Co. The company supplies Air Suction

Valves to Hero Honda. For manufacture of all these products

the company has three plants at Maraimalai Nagar, near

Chennai, Pondicherry and Gurgaon, Haryana. The growth of

the company has been in keeping with the growth of the

automobile industry.

Over the last 10-years the company has managed to show a

consistent positive growth in sales and EBITDA, except for

FY1999. Both Sales & EBITDA grew at a CAGR of 26% and

28% respectively during the period FY1993 to FY2003.

Further the company has made aggressive investment for

setting up of capacity in new products as well as existing

products. Its gross fixed assets have more than doubled to

Rs.127 crores in FY2001 from Rs.64 crores in FY1998. Major

capacity addition, had in fact, and to a large part been

completed by the end of FY2001. This addition to assets has

resulted into negative cash flow and the same was made up

through additional debt.

However the addition to fixed assets have slowed since then

and been funded out of depreciation provision. Moreover

there has been substantial improvement in profitability

resulting into better cash flow, which helped the company in

reducing the debt burden.

A few salient points & comments on the Ucal Fuel

System's Year Ended March 2003 Annual Report.

(Figures in parenthesis are those for the previous year ended

March 2002).

On the back of recovery in the automobile industry, its main

user industry, the company during the year ended March 2003

has posted 25.3% growth in gross sales to Rs.265.19 crores

(Rs.211.72 crores). PAT rose by 73.2% to Rs.28.15 crores

(Rs.16.25 crores). The overall improved performance was

mainly on account of good growth in the two-wheeler segment.

The domestic sales increased by 19.7% to Rs.240.36 crores

(Rs.200.81 crores), while export sales jumped 127.6% to

Rs.24.83 crores (Rs.10.91 crores). The growth in sales over

the previous year is on account of the growth in the two-wheeler

sector and the close linkages the company has been able to

forge with the automobile industry. The number of two wheeler

carburettors sold touched a record figure of 1,840,000 units.

The company has been able to maintain its high level of service

to its prestigious customers such as Maruti, Hyundai, TVS,

Bajaj, Hero Honda and Yamaha during the year. Exports to

Mikuni, was at all time high, showing the acceptability of the

company's products in the international market. During the

year the company commenced export of DCM-ETV and these

exports are likely to increase in the coming year.

Raw material cost was up by 14.2% to Rs.109.29 crores

(Rs.95.73 crores), while as a % to gross sales it decreased to

41.2% (45.2%). The company has successfully increased the

indigenisation of components, which were imported and were

a significant portion of the total raw material consumed. Total

consumption of imported raw materials decreased to 36.5% or

Rs.39.84 crores as against 49.6% or Rs.47.45 crores in the

previous year, while that of indigenous raw materials and

components increased to 63.5% or Rs.69.45 crores as against

50.4% or Rs.48.28 crores in the previous year.

However the staff cost and other expenses as a % to gross

sales increased to 5.3% (4.7%) and 17.7% (14.4%) respectively.

Other expenditure for the current year includes a sum of Rs.1.26

crores as the additional charges due to change in accounting

treatment of software expenditure. Moreover considering the

usage in respect of dies having a life span of less than 12

months, such expenditure during the year is treated as revenue

expenditure leading to an additional charge of Rs.1.06 crores.

EBITDA thus recorded a rise of 42.5% to Rs.54.66 crores

(Rs.38.35 crores).

Total expenditure for Research & Development was Rs.6.80

crores, which is about 3% of the net sales.

Depreciation increased by 4.5% to Rs.13.66 crores (Rs.13.07

crores). Based on technical evaluation undertaken on the useful

economic life of factory equipments, the depreciation rate has

been enhanced from 4.75% to 10%, this has mainly led to an

increase in depreciation charges. Depreciation as a % to sales

works out to 6%. It may be significant to note that the

depreciation per share works out to Rs.19.7 (Rs.18.8). EBIT

(excluding other income) rose by 62.2% to Rs.41 crores

(Rs.25.28 crores). EBIT Margin (excluding other income)

increased to 15.5% (11.9%).

Interest cost decreased by 62.6% to Rs.2.06 crores (Rs.5.51

crores), due to reduction in debts. Other income dipped by

7.1% to Rs.1.70 crores (Rs.1.83 crores).

Provision for tax (including deferred tax) increased by a

whopping 133.5% to Rs.12.49 crores (Rs.5.35 crores). Tax to

PBT increased to 30.7% (24.8%).

Total foreign exchange earnings were Rs.24.85 crores

(Rs.10.93 crores). Total foreign exchange utilized during the

year was Rs.47.86 crores (Rs.44.07 crores) out of which

Rs.34.57 crores (Rs.34.13 crores) was spent on import of raw

materials, components and spares, which accounts for 72.2%

(77.4%) of the total foreign exchange outgo.

The company paid dividend of Rs.6 (60%) per equity share as

against dividend of Rs.5 (50%) in the previous year. The

resultant cash outgo was Rs.4.70 crores including dividend

tax of Rs.0.53 crores (Rs.3.47 crores).

The company sought for lower dividend pay-out, since it was

left with net negative cash flow of Rs.0.78 crores, mainly on

account of higher working capital outgo of Rs.4.98 crores, net

addition to gross block of Rs.18.75 crores and repayment of

loans of Rs.11.22 crores. However in the current year we expect

a higher dividend pay-out from the company.

Cash profit rose by 42.6% to Rs.41.81 crores (Rs.29.32 crores)

and the Cash EPS stands at Rs.60.2 (Rs.42.2).

On an Equity Share Capital of Rs.6.95 crores (Rs.10 paid-up),

the earnings per share is Rs.40.5. The current price of Rs.279

discounts the YE March 2003 EPS by 6.9 times.

Current Market Capitalisation of Rs.193.91 crores discounts

Sales, PBT & Cash Profits by 0.9 times, 4.8 times & 4.6 times

respectively.

Enterprise Value (net of cash & liquid investments) works out

to Rs.201.21 crores and EV/EBITDA is 3.6 times.

Book Value per share works out to Rs.141.12 (Rs.106.35).

The ROCE and RONW were 33.6% (23.4%) and 28.7% (22%)

respectively.

Balance Sheet Details:

(Figures in parenthesis are those for the previous year ended

March 2002).

Year-End Total capital employed stood at Rs.127.23 crores

(Rs.115.86 crores), up by 9.8%, mainly due to higher reserves

and surplus. Net Worth rose 32.7% to Rs.98.08 crores

(Rs.73.91 crores). This was mainly due to higher profits carried

forward. Net Worth constituted 77.1% (63.8%) of the total

capital employed.

Year-End debt stood at Rs.20.83 crores (Rs.32.93 crores). This

was mainly due to part repayment of secured term loans of

banks and financial institutions, interest free sales tax loan

and fixed deposit. Debt as a % to capital employed reduced to

16.4% (28.4%). Based on year-end Debt figure, UCAL's interest

cost for the current year can be expected to further decline by

close to 50%.

Net Block, including capital work-in-progress was Rs.81.17

crores (Rs.76.25 crores) constituting 63.8% (65.8%) of the

total capital employed. Gross block increased to Rs.142.50

crores (Rs.127.94 crores). The net fixed assets (excluding capital

work in progress) rose by Rs.2.14 crores to Rs.74.72 crores

(Rs.72.58 crores). The capital work in progress was Rs.6.45

crores (Rs.3.66 crores).

Year-end investments were down to Rs.9.37 crores (Rs.7.24

crores). This was mainly due to investment made in the

subsidiary companies Ucal Machine Tools Limited and Ucal

Polymer Industries Limited during the year. The liquid

investment consisting of bonds and units stood at Rs.1.70

crores (Rs.1.79 crores).

The net core working capital has increased marginally by 1.2%

to Rs.30.50 crores (Rs.30.14 crores) as given below:-

Rs. Crores

Particulars FY2003 FY2002

S.Debtors 31.10 28.49

Add:Inventory 18.20 12.39

Less: Creditors 18.80 10.74

Net Core Working Capital 30.50 30.14

Receivables were up marginally to Rs.31.10 crores (Rs.28.49

crores). In terms of days, the receivables have decreased from

49 days to 43 days. There has been a 74.7% decrease in the

debtors above 180 days to Rs.0.20 crores (Rs.0.79 crores). A

conscious effort is being made by the company to bring the

debtors down from the current levels.

Inventory rose by 46.9% to Rs.18.20 crores (Rs.12.39 crores).

In terms of days, the total inventories increased from 21 days

to 25 days.

Sundry creditors increased by 75% to Rs.18.80 crores

(Rs.10.74 crores). In terms of days, the creditors have increased

from 41 days to 63 days.

Current liabilities were up by Rs.26.49 crores to Rs.57.39

crores (Rs.30.90 crores) due to increase in creditors and

provisions.

The cash and cash equivalents including deposits and liquid

investments stood at Rs.13.53 crores (Rs.9.74 crores).

Segment-Wise Sales Break-Up

(Figures in parenthesis are those for the previous year ended

March 2002).

The product portfolio of the company includes 4 & 2 wheeler

carburettor, Genset carburettor, Fuel & Oil pump, Throttle body

assembly, Delivery pipe assembly, Air suction valve, Fuel filter

and other automotive components. For manufacture of all these

products the company has three plants at Maraimalai Nagar,

near Chennai, Pondicherry and Gurgaon, Haryana. The growth

of the company has been in keeping with the growth of the

automobile industry. Its major customers in 4 wheelers are

Maruti & Hyundai and in two wheelers its TVS Motor, Bajaj

Auto, Hero Honda, Yamaha.

Recent emission norms have made the 4-wheeler carburettor

obsolete. Till FY1998, this product, at 73% of total sales,

contributed a bulk of its revenues. With prospects for 4-wheeler

carburettors bleak, there was a question mark on UCAL's future

prospects. However, as can be noted from the following table,

the company has, through a shift in product focus &

substantial investments, managed a complete & profitable

makeover to a manufacturer of 2-wheeler Carburettors & parts

for Multi Point Fuel Injection System.

(Rs crores)

FY2003 FY1998

4-Wheeler Carburettor 20.53 65.98

% to Total Sales 8% 73%

2-Wheeler Carburettor 119.19 18.94

% to Total Sales 45% 21%

Throttle body assembly 37.43 -

% to Total Sales 14%

Delivery Pipe assembly 19.17 -

% to Total Sales 7%

Air Suction Valves 51.84 -

% to Total Sales 20%

Total Gross Sales 265 90

Sales of 4-wheeler carburettors, have over the last 5-years

slumped. Despite the sharp decline in its principal product,

UCAL managed to more than double overall sales of the

company during the period FY1998 to FY2003.

For FY2003, about 45% of sales came from new products,

which were not part of UCAL's product portfolio during FY1998.

UCAL, now, has a more diversified product composition. Largest

contributor to sales is 2-wheeler carburettor - 45% of total

sales. There was a greater level of dependence, on a single

product, in FY1998, with 4-wheeler carburettors accounting

for 73% of total sales.

Sales from 2 wheeler carburettor which accounted for 44.9%

of the total sales increased by 51.6% to Rs.119.19 crores

(Rs.78.63 crores), while the sales from 4 wheeler carburettor

which accounted for 7.7% of the total sales improved marginally

by 4.9% to Rs.20.53 crores (Rs.19.58 crores). Sales from Air

suction valve, Fuel filter, Throttle body assembly and Delivery

pipe assembly increased 22.8%, 13.4%, 5.1% and 2% to

Rs.51.84 crores (Rs.42.21 crores), Rs.7.01 crores (Rs.6.18

crores), Rs.37.44 crores (Rs.35.63 crores) and Rs.19.17 crores

(Rs.18.79 crores) respectively, while sales from Fuel and Oil

decreased by 20.1% and 78.2% to Rs.3.06 crores (Rs.3.83

crores) and Rs.0.12 crores (Rs.0.55 crores) respectively.

The details of products along with the capacity, production

and capacity utilization are as follows:

Product Capacity Production Utilization%

Air suction valve 2400000 2210600 92.1

2 wheeler carburettor 2160000 1853969 85.8

Throttle body assembly 470000 442545 94.2

Delivery pipe assembly 420000 392594 93.5

Fuel filter 420000 330756 78.8

4 wheeler carburettor 240000 105750 44.1

Fuel pump 240000 64418 26.8

Genset carburettor 36000 28198 78.3

Oil pump 36000 2895 8.0

Source: Annual Report 2003

Addition to Block for FY2003, was funded out of depreciation

provision. This was despite substantial increase in installed

capacity, under a few of its major product categories. Also

manufacturing facilities were added to produce in-house

components hitherto imported like needle jet and float assembly.

Total net investment in Block was Rs.14 crores.

Installed Capacity

Product FY2003 FY2002 Var(%)

Air suction valve 2400000 1800000 33.3

2 wheeler carburettor 2160000 1500000 44.0

Throttle body assembly 470000 420000 11.9

Source: Annual Report 2003

Industry Structure & Development

The onset of liberalization in the early 1990s paved the way for

the growth of the automobile component industry. The industry

was opened for foreign investment and production facilities

were established to produce a number of latest model cars and

motorbikes and scooters as the country took a quantum leap

in technology with both foreign and Indian players vying with

one another to give the latest models to the Indian consumer.

Consequently the Indian automobile component suppliers have

been forced to keep pace with the changing technology, the

exacting demands of the manufacturers and function in a highly

competitive market with the constant threat of foreign

competition always looming large.

The auto component industry can be classified into three

groups. First there are the MNCs operating with wholly owned

subsidiaries or through units where they hold the controlling

stake. The second are those companies owned by Indian

promoters/public where foreign collaborators hold a minority

stake in return for technology already supplied or being

supplied. The third and the most important are those

companies that have no relationship whatsoever with foreign

ones either for technology or for financial support and are

wholly-owned by Indian promoters/public.

The size and the character of the industry is undergoing a

steady change. The unorganized sector is likely to be

consolidated, and there could be a reduction in the number of

companies operating in this sector. The organized sector could

also witness a change with the control of some more joint

ventures passing into the hands of their foreign partners.

India's auto component industry has over the years grown on

right lines producing the entire range of auto parts required by

the domestic automobile industry. In today's changed scenario

supply of integrated systems and sub systems instead of

individual components has become the order of the day, with

individual small components being supplied to the system

integrators instead of the vehicle manufacturers. Keeping with

changing times UFSL is also graduating to the manufacture of

Engine Management Systems.

Research & Development

Mikuni Corporation, the Japanese collaborator and foreign

promoters of UFSL, is planning to shift part of its Research &

Development (R&D) activities to Chennai. A new facility with a

building of about 40,000 sq ft has been acquired at Ambaffur

to set up an exclusive R&D facility to cater to the growing

technological needs of the customers and also to have some

additional space to expand production activity that cannot be

accommodated elsewhere.

The project will be internally funded at an estimated cost of

Rs.20 crores and may take about 18 months for completion.

This centre would have three distinct lines of operations

modification and development for components that are to be

indigenised, R&D for products manufactured by both UFSL

and Mikuni and R&D for products exclusively for Mikuni. This

will greatly enchance the technological strength of the company.

New Developments

Recently UFSL entered into technical cooperation agreement

with Orbital Engine Corporation of Australia to manufacture

and supply direct injection fuel system to the 2-stroke

motorcycle in India. The Indian market is increasingly emissions

conscious, with stringent emissions standards commencing

in 2005. Orbital OCP™ Direct Injection is a cost effective, viable

solution enabling 2-stroke motorcycles to meet these new

emissions requirements. It also provides significant

improvements in fuel economy in an expensive gasoline market,

greatly enhancing the acceptability of the product.

Further this will enable the company to become a system

integrator and service provider for Orbital combustion

technology. The focus will be on two-stroke two wheeler

manufacturers who are required to meet the emission standards

that will come into existence in 2005 and beyond. The company

is already working on this area with close collaboration with its

valued customers. With the new R&D facilities being set up at

Ambaffur and with the strong support of Mikuni the company

is likely to continue as an important player in this area.

Performance Highlights Of The Consolidated Entity

(Figures in parenthesis are those for the previous year ended

March 2002).

The company has reported consolidated financial statements

for the year ended March 2003, which represents the

consolidated account of UFSL along with its subsidiaries like

Ucal Machine Tools Limited (UMTL) & Ucal Polymer Industries

Limited (UPIL).

Consolidated gross sales increased 27.6% to Rs.270.67 crores

(Rs.212.09 crores), while PAT rose 70% to Rs.31.13 crores

(Rs.18.31 crores). Total Capital Employed stood at was up by

Rs.13.49 crores to Rs.136.12 crores (Rs.122.63 crores). Net

Block including capital work-in-progress increased by Rs.7.14

crores to Rs.90.23 crores (Rs.83.09 crores) constituting 66.3%

(67.8%) of the total capital employed.

The ROCE and RONW were 34.3% (24.4%) and 29.7% (23.2%)

respectively.

Consolidated EPS is Rs.44.8 (Rs.26.4).

Performance Highlights Of The Subsidiaries

(Figures in parenthesis are those for the previous year ended

March 2002).

Ucal Machine Tools Ltd.:

(Figures in parenthesis are those for the previous year ended

March 2002).

This company is a 100% subsidiary of UFSL.

During the year under review, gross sales were Rs.10.90 crores

(Rs.8.01 crores), up by 36.1%. However at net level the profit

rose marginally by 5.3% to Rs.1.78 crores (Rs.1.69 crores).

During the year under review, the new Die casting unit established

at Maraimalainagar commenced commercial production from 27th

July, 2002. UTI bank had sanctioned term loan of Rs.1.57 crores

for the further expansion of die-casting and tool room divisions of

the company. The company has purchased additional die casting

machines as envisaged in the expansion plans.

Ucal Polymer Industries Ltd.:

(Figures in parenthesis are those for the previous year ended

March 2002).

The company has posted a good performance with gross sales

growth of 67.2% to Rs.5.40 crores (Rs.3.23 crores). The net

profit more than doubles to Rs.1.24 crores (Rs.0.60 crores).

The capacity utilisation of the plant is 96% (82%). The company

in the development of rubber components has undertaken a

number of initiatives. New infrastructure has been created for

handling specialized plastic molded parts for UFSL.

During the year this subsidiary became 100% subsidiary of

UFSL. After UFSL bought out the stake from Suja Rubber

Industires Private Limited.

June '03 Quarter Update

(Figures in parenthesis are those for the previous quarter ended

June 2002).

For the first quarter ended June 2003, the company recorded a

16% growth in gross sales to Rs.69.17 crores (Rs.59.62 crores),

on the back of strong sales growth in car sales. All the element

of the cost as a % to gross sales witnessed a rise. Raw material

and components cost as a % to gross sales increased to 44.6%

(43.6%). Staff cost and other expenses as a % to gross sales

also increased to 5.9% (4.9%) and 14.7% (14.4%) respectively.

Depreciation charges fell marginally by 7.6% to Rs.2.80 crores

(Rs.3.03 crores). EBIT (excluding other income) at Rs.10.53

crores (Rs.8.53 crores) is up 23.4% over the corresponding

period of previous year. EBIT Margin (excluding other income)

during the quarter improved marginally to 15.2% (14.3%).

Interest cost was more than halved to Rs.0.36 crores (Rs.0.81

crores), due to reduction in debts. Provision for taxation

(including deferred tax) increased by 96.7% to Rs.3.58 crores

(Rs.1.82 crores). Tax provision as a % to profit before tax (PBT)

increased by 1000 basis point to 33.9% (22.9%). PAT registered

a rise of 13.9% to Rs.6.98 crores (Rs.6.13 crores).

Strong Promoters

Incorporated in 1985, UFSL was jointly promoted by

Carburettors India (holding 23.3% stake), a pioneer in the

manufacture of Carburettors and Fuel Pumps in India and

Mikuni Corporation, Japan, (holding 26% stake). IFC,

Washington, also holds 12.6% stake in the company capital.

The company has technical and financial collaboration with

Mikuni Corporation, Japan. It also has buy back agreement

with the collaborator for exporting their products. Its

relationship with Mikuni Corporation, Japan, has strengthened

over the years and the flow of technology from the collaborator

is smooth. Mikuni Corporation has assured the company that

it will continue to transfer technology to the company in future.

The company exports both 2 and 4 wheeler carburettors to

Mikuni Corporation, Japan.

Comments & Outlook

The company's fortunes are linked to the automobile industry,

which is cyclical in nature. The growth of the company has

been in keeping with the growth of the automobile industry. In

the first four months (April-July 2003), passenger car industry

and two-wheeler industry's total sales increased 39% to

245360 units and 7% to 1733376 units respectively.

In order to meet 2005 emission norms, two stroke engines will

be switching over to direct injection system or to four stroke

engines with opportunities for UFSL in the context of it having

signed an agreement with Orbital Engine Corporation (Australia)

to bring direct fuel injection system technology into India.

Moreover the Direct Injecton System may replace the

Carburettor used in two-stroke vehicles, whereas in the case of

four stroke vehicles the use of Secondary Air Valve (SAV) and

catalyst may become necessary. SAV is one product for which

the demand is likely to increase in the current year, as vehicles

will need to have SAV or SAV with catalyst to meet the emission

norms. Also with the tightening of emission norms, there will

be a continuing demand for use of Multi Point Fuel Injection

(MPFI) systems in the car segment.

The company is confident of supplying the above said parts.

Though there will be severe competition in the market, the

company does not foresee any difficulty in offering the qualitative

products at a competitive price to the OEMs.

For the full year ended March 2004, we maintain our Revenues

and PAT estimates at Rs.308 crores and Rs.36 crores. The current

price of Rs.279 discounts the estimated FY 2003-04 EPS of

Rs.51.9 by 5.4x (and FY 2002-03 EPS of Rs.40.5 by 6.9x).

We continue to recommend a buy on the stock at the current

price.