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Indian fastener sector is highly dependent on user industries like automobile, general engineering, consumer durable, railways and auto replacement market. Despite the sluggish trends in auto sector, which is also impacting the overall industrial sector, the fastener sector has recorded decent growth in turnover in the first half of the current fiscal. But the margins of the players were under pressure, and the sharp depreciation of rupee lead forex losses added to the industry's woes.
Prices improve in August – September 2011
There is sequential improvement in whole sale price index of fasteners from 130.2 in July-November 2010 to 130.3 in December 2010, which further improved to 131.1 in January – February 2011. The WPI hardened further to 131.4 in March – June 2011 and to 133 in July 2011. But it spiked to 138.5 in September 2011, and remained at that level in October 2011. Now the WPI of fasteners are 6.4% higher in August and September 2011, on y-o-y basis. This is the highest growth in WPI in the past 18 months, after the previous high of 7.1% in January, March and April 2009 and 8.2% rise in February 2009.
Production improves, but a slower pace
For twenty three months in succession, between November 2009 and September 2011, Indian fastener production recorded positive growth on y-o-y basis. But the growth has decelerated sharply from 37.7% in FY 2010-11 to 10.9% in April-September 2011. The fastener production in September 2011 grew by mere 5.5% in September 2011, which is one of the worst pace of growth in the past 23 months, next only to 3.2% growth recorded way back in November 2009.
Forex losses drags down profits of Sundram Fasteners
Sundram Fasteners reported 40% fall in net profit to Rs 18.43 crore on 17% rise in net sales to Rs 545.20 crore and 35% rise in PBIDT to Rs 79.46 crore in the quarter ended September 2011. The company's domestic sales improved by 12% to Rs 381.19 crore, but exports registered impressive 31% spike to Rs 164.01 crore during this period.
The fall in profits was primarily due to over 21 times rise (2156% increase) in interest cost to Rs 37.23 crore during this period. The interest costs including Rs 28.52 crore of losses due to exchange fluctuations in the quarter ended September 2011, as against profit of Rs 3.72 crore on this account in the corresponding previous quarter.
Sundram Fasteners commenced the production and supply of sprockets from its factory at Special Economic Zone, Mahindra City. Another facility at Mittamandagapet in Tamilnadu is likely to commence commercial production in the current quarter ending December 2011. The Mittamandagapet facility will manufacture fasteners for use in wind energy generators. Currently, a substantial portion of the fastener demand for wind power sector is met by imports. Global demand for fasteners to be used in the wind energy industry is expected to spurt considering the emphasis placed on generation of clean power.
Spike in interest costs hurt Lakshmi Precision Screws
Lakshmi Precision screws reported 47% rise in PBIDT to Rs 15.51 crore on 10% rise in net sales to Rs 83.28 crore in the quarter ended September 2011. But 99% spike in interest costs to Rs 7.38 crore and 60% surge in provision for depreciation to Rs 5.43 crore pulled down the profits, which ended 14% lower at Rs 1.91 crore in the quarter ended September 2011.
Fall in Margins hurt Sterling Tools
Sterling tools reported 4% fall in PBIDT to Rs 8.90 crore, despite 40% rise in net sales to Rs 70.35 crore and 124% surge in other operating income to Rs 0.38 crore in the quarter ended September 2011. Surge in interest costs by 61% to Rs 2.26 crore and 20% rise in provision for depreciation to Rs 1.90 crore added to the woes, leading to 18% fall in profits to Rs 3.37 crore in the quarter ended September 2011.
In its Annual Report for FY 2010-11, Sterling Tools has projected a growth of 25% in the Total Sales Turnover for the financial year 2011-2012. The company indicated that it derives about 75% of revenues from Original equipment manufacturers, 20% from retail market and the rest 5% from exports. In the six months ended September 2011, the company reported healthy 34% rise in net sales to Rs 140.13 crore, but net profit eased by 5% to Rs 7.49 crore.
Simmonds Marshall profit inches up
Simmonds Marshall recorded healthy 35% rise in revenues to Rs 23.23 crore in the quarter ended September 2011. But due to fall in margins, the company had to settle for 6% rise in PBIDT to Rs 4.23 crore. Over 19% rise in interest costs to Rs 0.56 crore and 33% rise in provision for depreciation to Rs 0.40 crore further moderated the growth, with reported net profit settling for 4% increase to Rs 2.21 crore during this period.
Dumping in after sales market
After sales or replacement market provides maximum margins for the domestic auto ancillaries in general and fastener segment in particular. However, there is intense competition in the after sales market, not only from unorganized domestic players, but also due to dumping from overseas markets, including China.
Outlook
Select players in the fastener segment, like Sundram Fasteners have been moving up the value chain consistently to de-risk their business model. Meanwhile, the sluggishness in auto and industrial segment meant slow down in the pace of demand for fasteners, which has lead to pressure on margins for the players. This is despite sequential fall in input prices in general and non ferrous metal prices in particular. We expect the second half to be better, factoring in improving order burnout in the capital goods sector, and as RBI is set to move away from tightening mode, which can unleash growth in the interest sensitive sectors like automobile, construction, real estate, consumer durables etc.
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