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'Should Omax Autos diversify its operations to increase profitability or increase capacity for production of same goods at a new location?'
Omax auto is a leading auto ancillary company in india which has seven manufacturing plants in different parts of the country and manufactures auto components like sheet metal and tubular components, sprockets and also has the largest welding facility in india. Its clientele includes companies like Hero Honda, TVS Motors, Carrier Aircon Ltd., Yahama to name a few. The company is facing challenging times because of falling profitability accompanied by a threat to the sales as its main customer, Hero Honda has decided to shift production from Gurgaon to Haridwar. These are the main reasons why the management has been contemplating to enhance its product line and diversifying its business. For the same, the company is evaluating the decision to set up a plant that will cater to the Indian railways by manufacturing train compartment metal bodies.
The expansion plan was tested through a number of financial analysis tools namely, Ratio Analysis and NPV and also through non- financial analysis for which SWOT analysis, Ansoff matrix and Porter's five force analysis was performed.
Key Areas of syllabus
Unit 1.6 - Organizational planning tools
Unit 3.2 - Investment Appraisal
Unit 3.6 - Ratio Analysis
Primary: The primary information will be obtained by meeting the management of the company and interviewing Mr Jatinder Mehta, the MD of the company. This will help in gaining knowledge of the existing product line of the business, the current and anticipated problems that the company is envisaging.
Secondary: The secondary information will be obtained from sources like the internet from where industry will be researched. Also, annual reports and financial accounts will be obtained from the company which will serve as an important source to evaluate the current business of the company.
Problems likely to be encountered and possible solutions
The difficulty in assessing the correct projected profit of the company which might not match with the actual profits post diversification.
Relying on the management's projected figure and performing the investment appraisal based on the figures provided.
Interview might not provide with all relevant information which might be privy to the company.
Relying with whatever information is obtained through interviews and validating the data with industry numbers from publicly available sources.
1st March - 2nd March, 2010
After discussion with teacher, topic modified
3rd March - 14th March
Researched Industry through internet and industry journals and publications from local library of FICCI 
15th March, 2010
Preliminary meeting with Mr. Tandon, the Chief Financial Officer of the company and Plant Visit.
Omax Autos Ltd., a part of Omax Group is into manufacture of sheet metal, tubular and machined components and sprockets for two-wheelers and four at its two plants in Dharuhera, Haryana. Hero Honda is major client of the company contributing 75% of its turnover. The company has a marketing tie-up with Hero Honda, near which the Haryana plant of the company is situated. Omax Auto's other customers include Maruti, TVS Suzuki, T I Diamond Chain and SRF. In 1994-95, the company doubled the capacity of its electroplating plant and sprocket division and constructed its proposed third unit at Gurgaon. It also purchased new land in Gurgaon to put up its fourth unit to exclusively meet the requirements of the a new unit of Hero Honda Motors at Gurgaon. The 4th plant at IMT, Manesar, started its commercial production in April, 2002 at an estimated cost of Rs.18 crores. It is also negotiating with MNCs in India for the supply of components to their international counterparts.
However, the company is now facing a tough situation as Hero Honda has opened up a new plant at Haridwar. Since the plant is getting tax benefits at that location and also since new technology which brings in higher efficiency for Hero Honda has been implemented, the company is gradually increasing its production at that new plant and adding new capacities there. As a result, it is expected that the Gurgaon plant's production of Hero Honda will actually decrease as the new plant at Haridwar gradually increases production. Already Omax auto's 75% sales are contributed to by Hero Honda. Within the existing capacities and the current production parameters, the company has seen a decline in margins and is operating currently at very low margins. The management is also of the view that its main customer's shifting of production base might prove quite costly for the company as the demand of raw materials from the existing plants of Omax Autos will go down and on the other hand, the transportation cost from Gurgaon to Haridwar will be high and with such low margins, the company management is wary of transportation of goods due to the cost involved. Therefore, the company has two options now: Either to set up new plant near to the plant location of Hero Honda in Haridwar or to diversify production of metal bodies for railways as a long term strategy. Thus through my question, which is 'Should Omax Autos diversify its operations to increase profitability or increase capacity for production of same goods at a new location?', I will try to arrive at either of the two proposed solutions by analyzing the costs and benefits and assigning probabilities to different scenarios through decision trees.
Indian Auto Ancillary Industry and its performance:
Auto ancillary companies were amongst the worst hit for the full year 2008-09 and till December 2010. Most of the companies have been having a stretched balance sheet with large amounts of debt. The relatively sudden contraction in automotive demand that followed in the wake of the global financial crisis, besides fluctuations in foreign exchange (forex) rates, increase in commodity prices, and the drying up of liquidity in the market, aggravated the situation further, causing a sharp deterioration in the corporate performance of many auto ancillary companies and leading to loss of margins and a decline in profitability.
Besides demand contractions, the auto ancillary industry was also adversely affected by high commodity (steel, aluminium, crude, rubber among others) prices in 2008-09, although the pressure eased to an extent towards the last quarter. While reduced capacity utilisation affected overheads, most companies responded with aggressive cost reduction initiatives, including rationalisation of employee expenses and other costs.
For the Indian auto ancillary industry, most export segments reported muted growth in 2008-09 despite the depreciation of the Indian rupee which pushed up realisations. Contraction in automotive sales in North America and Europe, which accounts for over 65% of India's auto component exports, had an adverse impact on component offtake during 2008-09 and the first nine months of 2009-10. Two segments that reported a particularly precipitous decline in sales were exported components for CVs and off-highway vehicles. The European CV market witnessed a fall for 18 consecutive months till November-09 and posted a decline of 33.9% during January-November 2009 over the corresponding period in the previous year. Component exporters like Bharat Forge Limited, Rane Engine Valves Limited, Wheels India Limited and Rane Madras Limited bore the brunt of this contraction. An added concern continues to be the possibility of Chapter-11 filings by global OEMs and Tier-I suppliers, which could lead to temporary disruptions in business and payments. The short-term outlook for the auto ancillary export markets remains weak with accretions to the order book being negative. While Government initiatives like scrappage schemes  in EU and "Car Allowance Rebate Scheme" in the USA have provided some impetus to growth, especially in the passenger car segment, there are no clear signs of recovery on the global front yet.
I considered a number of companies in my analysis to validate the deterioration of performance of the industry and found that Omax Auto has not been an exception. But the fact that the number one customer of the company has just shifted base and is gradually increasing the production from the new base in Haridwar could make the situation worse for this company.
On the other hand, railways seem a lucrative opportunity for many industries including Ancillary industry. Following seem to be the reasons for the same:
Revamping the Railways
Railways' 'Vision 2020' envisages a several-fold increase in investment levels, the largest chunk of this is to come from a projected surge in earnings. Announced in December, Vision 2020 is the blueprint for unprecedented investment in the network over the next 10 years. In addition to the extra 25,000km of new lines that will take the network total to 89,000km, the Vision calls for 12,000km of double and multiple track additions for a total of 30,000km nationwide, and an extra 14,000km of lines to be electrified for a total of 33,000km by the end of the decade.
Double-deck trains and modern dmus and emus will be introduced on the network which will include four new high-speed lines that will accommodate trains capable of reaching speeds of 250-330km/h. Budgets over the next 10 years are intended to evenly support the achievement of these goals that includes the construction of 1000km of new lines at a cost of Rs 44.1 billion during the next year, as well as Rs 13 billion to improve passenger amenities. Surveys for 55 new lines will also be conducted, along with gauge-conversion of 800km of track and 700km of track-doubling, with costs to be shared with local governments. To achieve Vision 2020's goals, there shall be a procurement of 280,000 wagons and 50,880 passenger coaches as well as 5334 diesel locomotives and 4281 electric locomotives.Â
This clearly shows the demand for railways components and the opportunity that lies for companies which are able to fulfill this demand. Omax Auto can definitely take advantage of this opportunity to create another line of business for itself and with that improve its revenue base and profitability.