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IN - Clutch maker Setco Automotive's bet on aftermarket business pays off

Setco Automotive's foray into the aftermarket business has helped the clutch supplier offset the loss of revenue from medium and heavy commercial vehicle, or MHCV, makers in one of the longest spells of slowdown in the industry over the past decade.

The component maker is the largest clutch supplier to MHCV makers, accounting for 100% requirement of automakers such as Tata Motors, Eicher Volvo and AMW, and nearly 65% of Ashok Leyland's requirement.

The company took a strategic decision to enter the aftermarket business when MHCV sales started slowing in the past two years while it derived nearly 90% of its revenues from MHCV makers through clutches supplied for new vehicles as well as those meant as spare parts.

The move has started paying off, with the company clocking a turnover of Rs 30 crore from its aftermarket business in the quarter to June.

"In the long-term, we aim to have 2:1 revenue ratio for our sales to OEMs (original equipment manufacturers) and aftermarket," said Udit Sheth, executive director of Setco Automotive.

He added, "If we annualise the aftermarket revenues of first quarter of 2014-15, it would mean incremental revenue of Rs 120 crore, which is nearly equivalent to the revenue loss incurred from our OEM segment."

Setco has increased its number of distributors to about 42, which has helped it expand its aftermarket operations and revenues. This network has contributed nearly 10% to its total sales volumes compared to nil two years ago. Besides focusing on maintaining its sales volumes, the company is taking several steps to improve its margins.

First, it aims to increase the contribution of exports to total revenues to 15% over the next few years, from 8% at present. The exports segment yields the highest margins among all four of the company's business verticals.

Second, the company is planning to invest in backward integration to reduce costs. It has decided to invest Rs 156 crore in a new casting foundry and Rs 25 crore to manufacture diaphragm locally that it currently imports from Germany.

"By setting up a casting foundry to manufacture diaphragm locally, we will be able to bring down our costs by 15-20%. The biggest advantage of owning a casting foundry is that it will bring down our volumes lost due to short supply of raw materials. We lose about 10-15% of our total turnover just due to the unavailability of cast iron. So, setting up new foundry unit will help us recoup our lost volumes," said Sheth.

Even as the company will have to pass on some of its costsaving measures to OEMs it will still improve its margins, he added.

Setco has incurred capital expenditure of Rs 200 crore over the past 30 months and it plans to spend a similar amount in the next two years. It aims to achieve consolidated revenue of Rs 1,000 crore by 2016-17, spelling a compound annual growth rate, or CAGR of 20% over the next five years, compared with 11% in the past five years.

"We are confident that our revenue growth will be higher than our historical growth on account of our new markets and products," said Sheth. With the company entering the light commercial vehicle and farm equipment business, a CAGR of 20% will be achievable in the coming years."

Source: indiatimes.com


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