Diversification to tractor segment will have a significant impact on the company’s growth: Harish Sheth, Setco Automotive

Harish Sheth, Chairman and Managing Director (CMD), Setco Automotive, spoke about the business of the company, reason for diversification into the tractor segment and investment into LavaCast among others during an interview with Vikash Kumar, Zee Business. Edited Excerpts: 

Q: Several people are not aware of the business of the company. Can you tell something about it?
A: Setco Automotive, almost 35years old company, manufactures clutches for the medium and heavy commercial vehicle industry. About 85-90 per cent of India’s OE market requirement is supplied by us. And, almost 9 out of 10 trucks manufactured in India are fitted with clutches manufactured by Setco. 

Q: There is a slowdown in sales in the auto sector. Did this slowdown had any impact on your business?
A: Market demand and sales are correlated to each other and any fall in demand has an impact on sales. But, we are so fortunate on this front as aftermarket goes up when there is a fall in commercial business. Secondly, only 4-5 clutches are required for a truck that has a life of 15years. So, fall in OE demand doesn’t have a major impact on our business.
 
Q: What is the sales ratio between domestic and export market? 
A: Export has a contribution of 5 per cent in our business. We have introduced a new product for the export market, the US and Europe. In fact, the export market will have a contribution of around 10-15 per cent to our total turnover in future. 

Q: Setco Automotive has entered a new segment and is manufacturing clutches for tractors. So, what is the future of the business? Also, talk about the sales in the segment and its profitability?
A: See, India is the biggest producer of tractors, in fact, India is producing more tractors than commercial vehicles if you take medium and heavy vehicles. Interestingly, the tractors being manufactured today have a powerful engine with high horsepower and accordingly, they need new types of clutches for the purpose. Thus, there is a shift in the market and we are entering that space and expect that there will be good growth at both places, i.e. OE and aftermarkets. Interestingly, the clutch has a life of two to two and a half year in tractors. 
 
Q: You have gone for internal investments like in LavaCast. Let us the time by when it will start benefitting you or has it has started paying off, if yes, then let us know its scale?
A: LavaCast is an interesting thing and was established with a thought that there will be a casting shortage in India and we have seen it in the last 3-4 years. It was created to help Setco in its growth, which is dependent on the supply of castings. It took two years to settle and will turn up to be profiting organisation from this year onwards. Besides, it will be fulfilling the demand of other customers like Tata and Daimler as well as of the export market. It will be in demand in the next few years and this demand will also add a lot to its profit. Secondly, Setco hasn’t faced any problem related to castings. 

Q: Talk about the debt and plans to reduce it. 
A: We have reduced our debts in the last two years. Setco Auto’s standalone term loan would be around Rs30 crores while the working capital loan stands around Rs150-175 crores. Its debt-equity ratio stands around 0.8-0.9 per cent, which is very good. But, it, the loans, will be repaid in next two-years, which means Rs30 crores will turn up to be zero. Possibly, we can also go for a new loan. In addition, we will be introducing a QIP or private equity in the next one or two years as it will help us in strengthening our balance sheet. It will also add value to the company. 

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Q: Let us know about your plans for FY20?
A: We will be investing around Rs50 crores on plant and machinery in FY20 while larger investments will be made in FY21 as the existing capacities will be reaching a saturation point by end of this fiscal.