Rico Auto Industries attempted to offset weak demand conditions from the two-wheeler industry in the March 2007 quarter, via enhanced sales of components to the four-wheeler segment and expanding exports.

However, higher raw materials like steel and non-ferrous metals affected its operating margins in Q4 FY07.

As a result, the company’s operating profit fell 2.6 per cent y-o-y to Rs 22.3 crore in the last quarter, while its net sales grew 16.2 per cent to Rs 200.39 crore. Its operating profit margin also declined 220 basis points y-o-y to 11.1 per cent in the last quarter.

This pressure on operating margins in the last quarter was due to adjusted raw material costs as a percentage of net sales going up by 210 basis points y-o-y to 60.6 per cent in Q4 FY07. In contrast, other auto ancillary players like Omax Autos’ operating profit margin improved 90 basis points y-o-y to 9 per cent in Q4 FY07.

The Street appears to have factored in the weaker performance of Rico Auto, as the stock declined 15.5 per cent during the past three months compared to an 18.5 per cent rise in the BSE Mid-Cap Index.

Rico Auto has recently formed a JV with Continental AG to manufacture hydraulic brake systems and this project is expected to come on-stream in the second half of 2008.

In addition, the company’s ability to manage higher metals costs over the next few quarters, will be crucial. At its current price, the stock trades at 10 times estimated FY08 earnings.