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Visakhapatnam executive arrested for rape of tribal.

Date: 20-02-2018
Subject: Visakhapatnam executive arrested for rape of tribal
The December quarter results brought an unexpected setback to investors riding the recovery wave in some of the auto-components suppliers. Shares of Motherson Sumi Systems Ltd and Gabriel India Ltd fell sharply after the companies last week reported a significant drop in profitability, despite a higher revenue base.

As in the case of Motherson Sumi, Gabriel India’s profitability was also hit by high costs. As pointed out earlier in this column, the former has several moving parts and much depends on the overseas business.

The business structure at Gabriel India is relatively simpler, with fewer product lines and limited exposure to overseas markets. But this is providing no significant relief. The auto parts company is investing in after-market (replacement) and export businesses. This is driving up costs, which may weigh on profitability.

“In addition, the company has increased its R&D (research and development) expenses to focus on new product introductions and has increased considerable headcount in this space. These increased costs have fully offset the impact of operating leverage in 9MFY2018 (the first nine months of the current fiscal year), resulting in lower margin,” Sharekhan Ltd said in a results review note on Gabriel India. “We expect cost increases to be structural in nature and, thus, would restrict margin improvement.”

According to an analyst at another broking firm, the replacement or after-market business offers better margins and should aid Gabriel India’s profitability. But the benefits would be contingent on the company’s ability to ramp-up after-market business.

In the first nine months of FY18, only 11% of Gabriel India’s revenues were generated by the replacement market. So margin accretion, if any, from this segment, can be a long-drawn process. Concurrently, the company is also looking to increase exports. As in the case of the replacement segment, benefits here too will be contingent on business ramp-up, which can take time.

Gabriel India’s prospects in the meantime will continue to be driven by the original equipment manufacturers. Fortunately for investors, the outlook remains brighter on this front. Aided by client approvals for its products, the management expects the revenue growth momentum to continue.

“The company indicated that it has received approvals for new models from customers like Suzuki, Yamaha and is also working on a new platform of Royal Enfield models. Further, it has received a Letter of Intent from Honda Motorcycles and Scooters India for the supply of front fork shock absorbers for its Activa model at two of its plants,” Nirmal Bang Institutional Equities said in a note. “We believe that Gabriel India will continue to report double-digit growth in FY19.”

The commentary sounds optimistic. But for a stock trading at 20 times one-year forward earnings, investors do expect better profitability. While the December quarter results have led to cuts in earnings estimates, the company should move quickly to rationalize costs to retain investors’ faith.

Source: livemint.com

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