High-margin products fuel Sundram Fastener's growth

ET Intelligence Group: In a highly competitive auto ancillary segment it is tough for a company to enjoy pricing power continuously. However, Sundram Fastener, India's largest fastener manufacturer, has done so.

High realisations and increasing share of superior margin products have enabled the Chennai-based firm to achieve a return on equity (RoE) of 21.84% in FY16, outstripping the industry RoE by nearly 2.2 times.

Typically , RoE expansion implies a company has been able to profit more on the same unit of volume sold. Hence, it's an indication of pricing power.

In the past four years, Sundram has consistently expanded its operating profit margins, which stood at 18.9% in the September quarter of FY17 against 12% in FY12, a gain of 700 bps.

It has adopted a three-pronged exercise to boost margins.


First, it increased share of business from higher margin products such as hub, shaft, powdered metal components, hot and cold forged products and pump assemblies with margins of 14-22% compared with conventional fastener business with 9-12% margins.

Due to rising rich product mix, share of conventional fasteners to revenue came down to 37% in FY16 from 43% in 2011. Rise in revenue from high margin products is obvious as shaft and forged business grew at an annualised 36.3% and 34.3%, respectively , between FY11 and FY16 against the company's revenue growth of 7.7% in the same period.

Secondly, it has consistently been increasing the spares and tool expenses of which significant ones are tooling expenses on the new product development. This provides good visibility of revenues from new product development and better gross margins.

Gross margins expanded to 48.3% in FY16 from 41.7% in FY12. Over the last six years, Sundram has incurred Rs 800 crore on capital expenditure and now has an extensive tool library helping develop customised solutions for customers. This also provided breakthroughs in the new clients. Besides, it offered a bouquet of products to automakers gradually consolidating raw material procurement.

Lastly, the company has been consistently increasing export revenues.Export business contributed nearly 30% of the total revenues in FY16.

Sundram's outperformance is likely to continue due to more value-added products, improving market share and higher content per vehicle. Analysts expect domestic and export business to grow 13% and 15%, respectively for the next fiscal year.

The stock closed at Rs 310 on Thursday, 18.4 times its projected FY18.