HYDRO S & S -- long term hold

HYDRO S & S (courtesy ValueInvestor)
CMP: 37

HYDRO S & S is a chennai based compay having three manufacturing facilities one in channai and two at pondicherry.i shall take the liberty to classify this company as an auto ancillary as it engaged in manufacture of Thermoplastic Elastomer compounds .
The companies performance during the year ended mar 05 was affected primarily due steep increase in price of prolyproylene a major raw materil for the company. However the VALUE INVESTOR is of the opinion that the worst for the company is behind .

POSITIVES
1) during the year ended march 05 the company has written off bad debts to the tune of Rs1.34 crs.

2) company is now able to pass on price increases to its customers to a major extent.

3)enhanced volumes needed by the automotive sector has made the company expand its capacities which have already been commssioned.

4)company has also put up 500KW wind energy generator to take care if enhanced power needs and increasing tariff rates
.
5) above expansions are through debts and internal generations.without any equity dilution

6)plans to broadbase its produt profile.(read M D A annexed below.)

7) despite very low profits the company has declared 12% dividend .the dividend distribution is twice the net profit earned.THIS CERTAINLY INDICATES MANAGEMENTS OUTLOOK FOR THE FUTURE.

8)for the current year to end one can project a turnover in range of RS 85/90 crs and profit of Rs 3.50/4.00 crs.(conservatively). giving an EPS of RS 6/6.25.

Given the excellent long tem prospects VALUE INVESTOR expects the price to double in a years time from the current level of RS 37


VALUE INVESTOR


MANAGEMENT'S DISCUSSION & ANALYSIS REPORT

A) INTRODUCTION
The objective of this report is to present the Management's perception of the various developments in the business environment, challenges and opportunities before the company as well as to provide an analysis of Company's performance. This report also summarises the Company's internal control measures and significant developments in the Human Resources front. It should be read in conjunction with the Director's Report to the Shareholders, Financial Statements and Notes thereon included elsewhere in this Annual Report.

B) MACRO-ECONOMIC SCENARIO
The performance of the economy was less than the previous year with the official estimates at 6.9% of the GDP growth. The inflationary impact on the industry due to the sharp rise in fuel as well as the shortage in metals and consequential impact on costs were a matter of serious concern during the year. These increases have affected the bottom line in many sectors particularly where the effect of increased costs were unable to be passed on. The various cesses imposed by the Government to support their schemes have also added to the general costs. The delay in the progress of reforms as well as the slow development in infrastructure is worrying. On the other side, the decreases in customs duties as well as the various FTAs without a level playing field would distort the domestic markets.

C) PERFORMANCE OF THE AUTOMOBILE SECTOR
This sector continues to show impressive growth particularly in the passenger car and two wheeler category, registering a 24% growth. However hike in the prices of key raw materials like steel and plastics exerted the pressure on margins. Both M/s Maruti Udyog Limited and M/s. Hyndai Motor (India) Limited announced major expansion plans for passenger cars in their respective locations. Renault & Volkswagen have also announced entry into the Indian market with production facilities .

D) COMPANY PERFORMANCE
a) Sales
During the year your company recorded a 19% growth in value and 6% growth in volume. Rapid inflation in the cost of polypropylene, the major raw material for the company's operations, with increases as high as 50%, posed new challenges and the company had to settle for sub-optimal growth to restrict the impact on the contribution margins for its products in different market segments.
The company is also looking at business volumes in segments other than automotive where resistance to recovery of cost of inflation in raw material is very less.
b) Exports
Exports remained static with marginal increase in selling prices. Your company has established new customers in the Middle East and Africa for incremental business in 2005-06.
c) Quality Initiatives
Your company continues to invest in hardware and training of its people in improving quality of products and services. An environmental chamber was established in its Research & Development centre to provide new level of quality assurance to the automotive industry for large moulded parts.
d) Technology Upgradation
The company continues to constantly interface with partners and vendors to develop newer solutions to meet its customer expectations. Significant progress was also made in reducing power and wastages in operations. The new products developed by the company led to enhancing its sales volume in 2004-05.
At Pudukkottai, your company commissioned a new mega compounder and successfully established performance within a short time of three months.
e) Business Initiatives
In order to establish markets in the related market sectors and grow with the plastic processing industry in India, your company is evaluating a number of business opportunities to enhance its product profile and expand into other application segments.

E) MANAGEMENT'S PERCEPTIONS OF RISKS
Like most industries, the company is also exposed to Business, Asset and Financial risks. Business risks include cyclical nature of demand for the company's products depending on new projects, continued growth in the Indian economy, adequate allocation of Government funds for road and highway development, more "global" design concepts to be used in the new models proposed to be launched b the car and commercial vehicle companies, continued positive climate for foreign investment in the country etc. There is also a need for continuous process and product up gradation to face the challenges of competition. All these risks are continuously addressed and acted upon in the various management review processes.
Asset risk includes threat to physical assets through accidents, natural and unnatural calamities etc. There is a system of continuous evaluation of insurance covers so as to cover both conventional and specific risks peculiar to its business, in an adequate manner.
With reference to foreign currency risks, the Company currently enjoys the advantage of favourable currency rates so far as its imports are concerned in view of the rupee strengthening against the U S Dollar. The forex position is being continuously monitored to take appropriate action to minimize the impact of negative changes.
Since the exports proceeds are low compared to import requirements, the appreciation of the rupee does not significantly affect its realization. The company is continuously evaluating this situation to hedge currency exposures at an appropriate time.

F. ONGOING INITIAVES AND FUTURE OUTLOOK
The O.E. market for Automotive and Appliances is dominated by the Multinational Companies in which tier 2 suppliers like your company face increasing competition from both domestic and multi-national competitors. The three critical parameters of Quality, Cost and Delivery are measured by O.E.Ms to judge the competitive edge of one supplier over the other.
Your company is paying attention to continuously improving the quality of its products and services, in reducing the manufacturing cost through reformulation, productivity improvement, energy conservation and reliable logistics to meet "JIT" requirement of the supply chains of the OEMs. The growing automotive industry is much larger than the domestic market as assembled passenger cars and value added auto components increasingly find export markets.
While the future outlook is bright, the major area of concern is the unhealthy competition and sharp increase in the prices of polypropylene. Realising this, your company is already developing new products of higher contribution margins in sectors other than automotives such as packaging and consumer products.