Date:16/10/2005 URL: http://www.thehindubusinessline.com/bline/iw/2005/10/16/stories/2005101600310800.htm

Back MICO: Buy

B. Krishnakumar

LONG-TERM investors may include Motor Industries Company (MICO) in their portfolio. The encouraging growth prospects and the rising contribution from exports are major positives. Though the profitability in the near term would be under pressure on rising input costs, the growth prospects over the long term make MICO an attractive investment.

Though popular for the spark-plugs used in two-wheelers, MICO's range includes an array of products including power tools, car audio systems and fuel injection systems. The company derives a chunk of its revenues from fuel-injection systems used in the automotive diesel engines.

The company has presence in the original equipment and replacement markets of the automobile industry. It derives close to 25 per cent of its revenues from the replacement market and about 50 per cent from the OEM. In the automobile industry, MICO has a major presence in the commercial vehicles and tractor segments.

Helped by robust growth in automobile production, the company has reported a steady growth in performance in recent quarters. The growth rate has, however, been tempered in the first half of this fiscal by the slowdown in the replacement market sales and the pressure on margins.

For the six-month period ended June 2005, revenues increased by 21 per cent to Rs 1,388 crore, even as post-tax earnings dropped 10 per cent to Rs 194 crore. The investment in production facilities for manufacture of Euro III-compliant systems has inflated depreciation charges. This, along with the pressure on margins, played a key role in pulling down the profitability.

Besides, the replacement market demand for fuel injection system was also affected recently by the mounting competition from the cheaper imports and local producers. The company is addressing the situation; taking into account the implementation of Euro II and Euro III norms, the company is likely to log steady growth.

The company is setting up facilities to cater to the potential demand flowing from the implementation of the Euro III emission norms. With compliance to the Euro II norms made mandatory across the country, the demand for MICO's products appears positive.

The company has been identified as a sourcing base by its German parent. This has resulted in a strong growth in exports in recent years. For the year ended December 2004, exports accounted for about 17 per cent of the turnover.

From an investment perspective, the pick-up in exports, implementation of more stringent fuel emission norms and rising contribution from non-auto businesses are positive features. Taking into account these factors, the long-term growth prospects for the company appears positive.