Date:24/10/2004 URL: http://www.thehindubusinessline.com/bline/iw/2004/10/24/stories/2004102400490900.htm

Back Omax Autos: Hold

B. Krishnakumar

TAKING into account the buoyancy in the automobile industry and the initiatives recently undertaken by Omax Autos, the long-term growth prospects appear encouraging. Shareholders may hold the stock and use price weakness to step up exposure.

Omax Autos makes auto-parts sheet metal and tubular components. The company's product portfolio includes body frames, sprockets, electroplated tubular components, gear shafts, rocker arm shafts and piston rods. It is also one of the largest producer of sprockets in the country. Apart from two-wheelers, the company's products are used in commercial vehicles and tractors as well.

Omax Autos derives over 60 per cent of its revenues from Hero Honda. To a large extent, the company's fortunes are linked to it. The recent volume growth recorded by Hero Honda has helped Omax post improved performance over the recent few quarters.

For the year-ended March 2004, turnover rose 12 per cent to Rs 391.3 crore and post-tax earnings 26 per cent to Rs 14.31 crore. The company's equity base has risen to Rs 20.31 crore consequent to the recent bonus, rights and preferential offers over the last couple of years.

Over the recent years, the company has taken steps to reduce the revenue concentration from Hero Honda by tapping the export and domestic markets. The customer base now includes companies such as Sundaram Clayton, TVS Motor and Toyota. It also supplies to several auto-majors including Maruti, Yamaha, Eicher Motors and Delphi Automotive Systems.

Exports has been another area of focus for Omax Autos. Though exports (about one per cent of turnover) is not a major contributor to the earnings, the recent initiatives and the capacity expansion projects should help the company scaling up export earnings.

With customers such as Delphi and Tenneco Automotive in its fold, export earnings are likely to make a significant contribution to earnings in the future.

The company has commissioned expanded capacities at Bangalore and Gurgaon, the benefits of which would be fully captured from the next year. The unit in Bangalore would place the company in a better position to service customers based in the South such as TVS Motor and Sundaram Clayton.

On the flip side, the rising price of key raw materials is worrying. With a major exposure to original equipment market, the company's ability to pass on input cost rise would be restricted as it would be difficult to revise product prices.

The growth in volumes would be the key driver of earnings growth, while profitability is likely to remain under pressure. Taking into account the growth factors, long-term investors can use market-related weakness to take exposures in Omax Autos.