The economic downturn, which hit India Inc. in the middle of 2008, could not have come at a more inopportune time for the Sona Group. Only about a year before that, it had invested Rs 300 crore to ramp up its capacities.
“The downturn was unexpected. It came as a shock. For the first time since the company was set up in 1985, we posted a loss (in the April-June 2008 quarter). It was an extremely difficult and challenging situation,” says Sunjay Kapur, vice-chairman and managing director of the group.
The Rs 700-crore Sona Koyo Steering Systems Ltd (SKSSL) is the group’s flagship company, and the largest manufacturer of steering systems in India. It caters to automobile companies like Maruti Suzuki, Toyota, Hyundai, Tata Motors, Mahindra & Mahindra, General Motors and Mahindra-Renault.
It also exports high quality precision products to the US, Europe and Japan either on its own or through its network of overseas joint-ventures.
The downturn hit most of its customers, and the Sona Group suffered as a result.
Consumer sentiment was low, banks were wary of lending and fear of job losses prompted people to defer planned car purchases.
“You can gauge the extent of the hit from the fact that in December 2008, we were operating at 50 per cent capacity,” says Kapur, who, incidentally, is married to film star Karishma Kapoor. “I, and the senior management team suffered tremendous anxiety. I spent weeks of sleepless nights. There was a time when I was sleeping for only three to four hours a day.”
Sona Koyo’s products have, on average, an import content of 30 per cent. The losses were exacerbated by the sharp rise in international commodity prices and violent fluctuations in the foreign exchange market.
“We did not understand the foreign exchange market and so, did not hedge. Needless to say, we were badly hit by the fluctuations in the currency market,” he adds, frankly.
The losses kept mounting. From Rs 1.64 crore in the second quarter of 2008-09, it climbed to Rs 7.32 crore the following quarter and further to Rs 17.24 crore in the October-December quarter.
Investors began dumping the Sona Koyo stock on the market, sending it plunging from Rs 29.65 on August 1, 2008 to Rs 9.60, or less than its face value on October 20 and further to Rs 5.42 on March 17, 2009.
The situation clearly called for some drastic measures.
“We began by continuously reviewing our sales plan. There was a phase when we were reviewing our sales plan on a weekly basis,” says Kapur.
Then, all further capital expenditure plans were put on hold. Sona Koyo also ruthlessly cut its costs.
“We cut salaries of senior and junior management by about 30 per cent but did not touch the wages of employees on the shop floor. This way, we managed to bring down our salary bill from 8 per cent of total sales to 6 per cent of total sales,” says Kapur.
Manufacturing costs were also brought down from five per cent to two per cent of sales, through a mix of technical and management adjustments. “We vigorously pursued process of content localisation and the results are beginning to kick in now,” he informs. While it was thus engaged, the company also rejigged its loan portfolio.
“We moved a lot of debt from short to longer tenures. We also moved debt to public sector banks,” Kapur says, but declines to share details.
Sona Koyo has total debt of about Rs 240 crore.Things began to look up from January this year.
“From January, there were indications of pick up in sales and March seemed to be best month in a long, long time,” says Kapur, a keen polo player, with visible relief.
That was when Sona Koyo’s cost reduction measures began to take effect, thus, improving its bottom line. Losses for the January-March 2009 quarter came down to Rs 4.83 crore, and the company returned to profitability in the first quarter of this financial year, in which it earned Rs 87 lakh.
Analysts are bullish about Sona Koyo’s prospects. “It is increasing its focus on the domestic market,” says Chirag Shah, an analyst with broking and research firm Emkay Research.
The strong volumes growth posted by Maruti, Hyundai and M&M, its three top customers — who account for 80 per cent of its revenues — offers Kapur and his team hope that this decision will pay rich dividends in the quarters to come.