Worst over for auto ancillary companies: Sona Koyo Steering

Below is the verbatim transcript of Surinder Kapur and Harish Sheth's interview with CNBC-TV18’s Latha Venkatesh and Sonia Shenoy. For the complete discussion watch the accompanying videos.

Sonia: Not too many people are aware that a Setco Automotives is the largest manufacturer of clutch assemblies for the commercial vehicle sector in India. So you would be able to give us a clear indication of whether things are picking up on the ground because you do supply to a lot of companies like Tata Motors, Ashok Leyland etc, what is your view on how the situation has improved?

Sheth: Generally commercial vehicle manufacturers are thinking of a probably about 30-40 percent growth in the second half over the first half. That is a kind of indication they are giving in some of the meetings I have had.

With a growth in infrastructure and feel-good factor - transporters have come forward and started buying the vehicles. So we feel that OE demand will increase considerably. We are also in the aftermarket business in a big way and with the infrastructure improvement, commercial vehicle’s movement will improve considerably as there will be money in the economy. So we are looking at a very positive next five years. 

Latha: You said that commercial vehicle guys are telling you that they are expecting a 30 percent improvement in sales. Your own Q1 numbers show revenue growth of 49 percent. What are the orders you have got, are the orders for FY15 30 percent better or is it even better, 50 percent better for you?

Sheth: Our business is divided into three parts, one is OE, aftermarket and exports. In Q1 exports and aftermarket both grew considerably and OE also in certain areas grew considerably. The movement is moving towards the bigger vehicles and there naturally the value will be more. So considering that the growth is coming and we expect the same thing to continue throughout the year.

Sonia: Is it a lot of the inventory build up that we have seen in this month that has resulted in higher sales or do you think in general the worst is over for the passenger vehicle sector?

Kapur: Tere is no question that the worst is over. I think August sales - you have probably seen the mix of inventory reduction as well as new production. Generally one can make a very clear categorical statement that the worst is over that the fact that growth is here to stay. The question is how much growth. Having seen Q1 GDP growth at 5.7 percent, it tells us that things are improving. There are all indicators that things are improving.

Latha: Your own Q1 number was a dramatic turnaround on the net front, it was a profit of Rs 3.5 crore, but more importantly operating margins were at 12.5 percent compared to 9 percent, EBITDA was 52 percent higher but revenues were up only 11 percent. So is it that you are going to see greater capacity utilisation and how will you extrapolate all these numbers for the full year, what will revenues grow, will it be way more than 11 percent?

Kapur: No, I don’t think it will be way more than 11 percent. I think as Mr Sheth discussed earlier, everybody is now looking at a mix of earlier -- for instance Sona Koyo was heavily concentrated on domestic OEMs, now we are getting into the overseas market. So I think we are getting a mix of customers into the fold of the company. But looking at our EBITDA margin improvement which we focused on, is mainly because of reduction in cost that we have implemented in the company, there is an improvement in material cost by way of localisation etc.

W will see improvements in margins this year. I don’t believe the sales are going to be that much more than what we have already seen because there is a pick up but the pick up of various models, it is not a general pick up. For instance, you have seen Maruti, Honda etc pick up. Tatas and Mahindras did not pick up in August. So I think you will see a mixture of vehicles, of platforms which will do well or not do so well. But the important thing to focus on is that generally the economy is improving, generally the automotive industry is improving and I think we will see better results in the months to come and in the years to come.