Asahi India Glass: Hold

Investors with a two-three year perspective can retain their exposure in Asahi India Glass. At the current market price of Rs 109, the stock trades at around 36 times its trailing 12 months earnings.

Though the valuations appear stiff, it should be seen in the light of the company's sedate performance over the last few quarters due to higher input and fixed costs.

But the company's leadership position in the automotive glass segment, capacity-additions over the last few years and entry into value-added segments such as architectural processed glass, indicate that earnings can scale up significantly over two-three years.

Fresh investments can be considered on signs of higher traction in earnings.

Business

The company has three SBUs (Strategic Business Units) — auto glass, float glass and glass solutions. While the auto glass segment brings in 62 per cent of the revenues, the float glass division chips in with 36 per cent.

The company is the market leader in the auto glass segment with 82 per cent market share.

It caters to almost all the OEMs (original equipment manufacturers) in the country including Maruti, Honda Siel, Toyota Kirloskar, Hyundai and General Motors. It also supplies to the domestic after-market apart from exports.

A separate subsidiary, AIS Glass Solutions, was set up in 2004-05 to cater to the demand for architectural glass.

The division produces value-added products such as stronglas, securityglas, acousticglas and insulated glass units. It has a 20 per cent share in the architectural glass market. The company's integrated glass plant at Roorkee, Uttarakhand, went on stream in January 2007 and makes float glass and other value-added glasses such as reflective glass, mirror, automotive glass and architectural glass.

It has also increased capacity at its existing facilities at Chennai, Taloja and Rewari.

Margin Pressures

The operating margins for the June 2007 quarter stood at 32.7 per cent as against 21.7 per cent in the previous quarter.

This rise in margins was not brought about by operational efficiencies but by a foreign exchange gain of around Rs 44 crore on foreign currency loan.

The company's margins in the last few quarters have been impacted by fluctuations in the price of float glass and increasing power and fuel costs. (Energy costs constitute 30 per cent of the glass cost).

The company plans to mitigate this by focusing on value-added products such as solar control glass, water repellent glass, tinted glass and the architectural glass segment that is backed by a strong surge in construction activity in the country.

Besides, the sustained demand in the passenger car market augurs well for the automotive glass division, as automotive glass gets higher margins than float glass.

The company can use the additional float glass capacity at Roorkee for captive consumption to produce automotive and architectural glass.

This will reduce its exposure to fluctuating float glass prices in the domestic and import markets. This has been a key source of pressure on margins.

Higher interest and depreciation costs due to ongoing capacity expansions have also impacted net profit margins in recent quarters.

With the majority of the capital investments behind it, depreciation costs may stabilise over the next couple of years.

Besides, the Roorkee plant is also expected to offer a 10-12 per cent cost advantage because of a tax holiday, lower power tariff and reduced freight cost.