UCAL faces a threat of product obsolescence in its main product line: four-wheeler carburettor, which is likely to be phased out when new fuel emission norms become applicable. An extract from CARE's October-December 1996 Review.
Rationale
UCAL was set up in, in November 1985, as a private limited company. Carburettors Ltd., Chennai and Mikuni Corporation (MCL), Japan got together to manufacture carburettors for Maruti Udyog in a joint venture operation finalised in December 1988. UCAL subsequently became a public limited company in 1989.
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The company is professionally managed, with active participation from MCL. Industrial relations have been harmonious.
UCAL is the sole supplier of carburettors to MUL's cars. Apart from this, the company also supplies `two-wheeler' carburettors to TVS-Suzuki and `genset' carburettors to Shriram Honda. The company has recently begun supplying carburettors for three-wheelers.
UCAL's turnover and PAT have grown at CARGs of 37 per cent and 143 per cent respectively over the last five years. During this period, UCAL has also improved its profitability margins through indigenisation and cost reduction.
Overall gearing was low at 0.73 as on March 31, 1996 and interest coverage ration in Fy'96 was comfortable at 6.54, indicating high safety margins to the company's creditors. UCAL is facing a threat of product obsolescence in its main product line viz. Four-wheeler carburettor, which is likely to be phased out by the year 2000, when new fuel emission norms become applicable.
Company Background
Started as a technical-cum-financial collaboration between MCL and CL, UCAL went public in October 1989 with an offer of 5.2 million shares issued at par. After a private placement and a bonus issue, UCAL's paid up capital as on March 31, 1996 stood at Rs 69.5 mn. The major shareholders are MCL and CL with 23.3 per cent each and IFC, Washington with an 18.3 per cent stake.
The company's manufacturing facilities have been awarded both the ISO 9002 and QS 9000 Quality certificates. UCAL currently enjoys market leadership in the "Twin Barrel Down Draught" carburettor segment. The company is professionally managed with well qualified personnel at all levels.
Operations of the Company
UCAL's main product lines are four and two-wheeler carburettors, genset carburettors and the fuel pump assembly. The major customers are the four and two-wheeler manufacturers and sales to the replacement market is negligible (except for fuel pumps). About 10 per cent of four-wheeler carburettor output is expected to be exported in FY'97.
Domestic customers include MUL, Premier Automobiles and Hindustan Motors. The entire two-wheeler carburettor sales goes to TVS Suzuki.
With sufficient capacities created in all its product lines, UCAL will be able to manage the expected boom in the automobile sector.
The company's manufacturing facilities located at Maraimalai Nagar and Pondicherry are well equipped with a combination of general and special purpose machines. UCAL has built a good vendor base in and around Madras for the supply of raw materials and components.
It is also comfortably placed on the power front.
Financial Analysis
UCAL's turnover (Net Sales) and PAT have grown at CARG's of 44.4 per cent and 101.8 per cent over the four years ended March 31, 1996. The growth was due to a steady increase in demand from MUL and UCAL's diversification into the two-wheeler and genset carburettor segments.
A continuous reduction in raw material and component costs through indigenisation has helped the company to improve PBILDT margins from 21.3 per cent in FY '93 to 26.3 per cent in FY '96. With PAT margins at 16.1 per cent and ROCE at nearly 33 per cent in FY '96, UCAL's profitability position was comfortable.
The capital structure of the company was also sound, with overall gearing at 0.73 as on March 31, 1996. Moreover, with interest coverage at 6.54
during FY '96, the company's debt servicing capacity was good.
The current ratio was rather low at 1.34 as March 31, 1996 and the average creditors outstanding had gone up by nearly 68 per cent in FY '96 (over that in FY '95), indicating a fairly tight liquidity position.
Industry Review
The auto component industry produces a wide range of components. UCAL's products belong to the engine parts category. The engine parts collectively refers to the various assemblies and components that go into the manufacturing the engine system. Manufacturers in this category are typically driven by OEM and, therefore dependent on growth in the automobile industry.
Carburettors are used in petrol driven vehicles like cars and two wheelers.
Prospects
Possible obsolescence in the main products viz. the four-wheeler carburettor will necessitate a total shift in product focus beyond the year 2000. Although demand for two-wheeler carburettors would still continue. The company plans to set up lines for the manufacture of the 'Throttle Body' for FIP as also the 'Electronic Fuel Pump'. The turnover expected from these products is in the region of Rs 110mn to Rs 120 mn. This along with the two-wheeler carburettor demand is expected to ensure the viability of the company beyond 2000.