Saturday, November 26, 2011

SUNDARAM BRAKE LININGS LTD- SOMETHING SPECIAL








Sundaram Brake Linings is a major producer of friction material, consisting of brake linings, blocks, disc pads and clutch facings that are used in automobiles.Ashok Leyland and Tata Motors are the major customers of this chennai based TVS group company.SBL is also exporting its products to various countries and almost 40 % of its income is from exports.Enthused by the increasing demand,recently company started a new production facility in SEZ, Mahindra World City ,Tamilnadu.Now company's all   manufacturing plants  are producing ASBESTOS-FREE products which will help to increase its exports.

                                           Sundaram Brake Linings was an outperformer from TVS Group till 2008.Its share price never came down below Rs.400 Mark during 2005-2007 period.But it crashed from a level of Rs.440 to just Rs.98/- in 2008 alone .These type of crashes in share price are common today because of share pledging by promoters or various type of frauds.But nobody is expecting such actions from one of the most conservative group from South India - the TVS Group .There was nothing wrong with the Sales and profitability of this company but a special reason for this poor performance of stock price.SBL is a victim of mis-selling of complex derivative products by banks which came to light  during 2008.Many other companies like Rajshree Sugar,Precot Meridian..etc are also in news related with such transactions during the mentioned period.Anyway , their efforts to protect from  foreign exchange fluctuation ends in huge losses for SBL.Then the company filed cases against these banks and at last it ends in an out of court settlement.As per the terms company is liable to pay only one tenth of the actual loss .Now, company is making provisions in each quarter for this payment and the said amount is mentioned as extraordinary item in the published results.An amount of Rs.5.60 Cr provided last year under this head .After this provision company made a net profit of Rs.6.30 Cr in 2010-11.EPS for last year including special provision is Rs.16 and that excluding this provision is more than Rs.30/-.Even in a tough time for auto parts makers, last quarter company improved its performance.This special provisioning will end in next 18 months starts from September 2011 onwards (in March 2013). The true picture of this company's earnings will reflect in its financial result only thereafter.Company having very small equity base of just Rs. 3.93 Cr and consistently paying dividend of 40 % or more for the past many years. Actually it was more than 125% each before 2008 incident .Considering the Cyclical nature of auto and auto ancillary business and the trend in interest rate , 2013 may be a good year for this sector.After the end of this provisioning , I feels the market will realize the true picture of this company and it will go back to its past glory.At current market price of Rs.155/- it is even quoting very below its book value of Rs.250/-.Company 's debt equity ratio is just 0.38 and not even a single share is pledged by the promoters. Those who are willing to show some patience , this is one of the best bet from this sector @ Rs.155/-

4 comments :

  1. whats ur take on A.K. capital services ?

    ReplyDelete
  2. I fully agree with this analyst. I have been a derivative dealer handling complex products and i know the disastrous effect of entering into such products without understanding the risks.

    Thereafter I moved into risk management in an international bank and introduced a transparent risk disclosure and product knowledge pack , which company management had to sign before entering into derivative projects.

    Such procedure is sadly lacking in indian banking industry and hence the choas.

    Once bitten twice shy- this company will emerge stronger.

    Future is bright for this company but we need a three year holding horizon

    ReplyDelete
  3. This got recommended by 5 paid services as soon as you posted this blog.

    All paid services are eating the fruits which you have sown.

    ReplyDelete

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