ICRA RESEARCH SERVICES

Corporate Ratings
Anjan Deb Ghosh +91 22 3047 0006 aghosh@icraindia.com

Indian Auto Components Industry
Weak demand a bigger concern than rising costs

Contacts: Subrata Ray +91 22 3047 0027 subrata@icraindia.com Jitin Makkar +91 124 4545 368 jitinm@icraindia.com Ashish Modani +91 20 2556 1194 ashish.modani@icraindia.com K Srikumar +91 44 4596 4318 ksrikumar@icraindia.com

ICRA LIMITED

Page MARCH 2013

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Quarterly trend in profit margins of auto OEMs and auto component manufacturers Trend in margins over last three years EBITDA margin influencers in 9m 2012-13 Auto ancillaries that reported forex losses in 2011-12 and 9m 2012-13 Interest coverage movement of auto component manufacturers 4. Q3 2012-13 performance of auto component manufacturers Asahi India Glass Limited Banco Products (India) Limited Bharat Forge Limited Exide Industries Limited Gabriel India Limited Hinduja Foundries Limited Lumax Industries Limited Mahindra Forgings Limited Motherson Sumi Systems Limited Munjal Showa Limited Sona Koyo Steering Systems Limited Sundaram Clayton Limited Sundram Fasteners Limited Wheels India Limited ZF Steering Gear (India) Limited ICRA LIMITED P age |2 . Overview 2. Outlook for component exports 6. NEMMP 2020: A sunrise electric vehicle opportunity for OEMs and suppliers 10.WHAT’S INSIDE? 1. Outlook for supplies to the domestic OEM segment 5. Outlook for domestic replacement market sales 7. Weak Global Demand: Acquisition Opportunity 8. Revenue growth drivers of auto component industry in 9m 2012-13 Auto component manufacturers whose revenue growth suffered in 9m 2012-13 Auto component manufacturers that maintained steady revenue growth in 9m 2012-13 3. Back Home: Trends in JVs and Technical Collaborations 9.

We expect operating earnings growth of auto component manufacturers to be the weakest in Q4 2012-13 given the high base of the corresponding previous quarter. If the year 2011-12 was bad. Buyers’ Credit and other foreign currency borrowings that remain unhedged. the year 2011-12 marked the commencement of a slowdown phase as volumes in the domestic Passenger Vehicle (PV) and Medium & Heavy Commercial Vehicle (M&HCV) segments began to stutter. particularly related to parts meant for CV applications due to sharp contraction in demand (partly due to inventory correction due to build-up during H1CY2012). However. starting Q2 2012-13. On the exports front. After a frenzied period of 2009-10 and 2010-11 when all automotive spots . but steady expansion in demand for Light Vehicles and Commercial Vehicles (CVs) in North America was adequately offsetting the overall exports weakness. the possibility of further policy rate cuts and their eventual transmission to corporates may provide some relief to industry participants. favourable change in model mix. FCCBs. while a large number of entities that import raw materials do generally get compensated by OEMs at the prevailing exchange rate (although compensation is with a lag). but this segment. continued anaemic demand conditions and unyielding pressures stemming from various other cost overheads mentioned above. making effective management of forex risk an imperative. the USD/ INR rate has generally remained in the vicinity of 54-55 in 9m 2012-13. As per our sample of 35 publically-listed auto component manufacturers. exports and replacement market . like in Q4 2011-12. rise in content per vehicle. the biggest trepidation for auto parts makers currently springs from tepid automobile demand. However. The net profits of auto component manufacturers with foreign currency loans has been weighed down by sharp appreciation of the USD against the INR since the second fortnight of September 2011. resulting in MTM losses on restatement of foreign currency loans and higher interest outgo. Yet. ICRA LIMITED P age |3 . the average revenue growth of these select entities (during the last eight quarters) has been steadily declining with YoY growth being lower in each passing quarter since Q1 2011-12. Profitability Till 2011-12. auto component supplies to Europe had already been witnessing sluggish growth over the last few years. auto parts exports to USA also have declined significantly. it allowed auto component manufacturers to have one less worrisome variable to contend with.INDIAN AUTO COMPONENTS INDUSTRY Weak demand a bigger concern than rising costs MARCH 2013 Overview Revenue Growth Trends and demand outlook The Indian auto and auto components industry is currently facing its most formidable challenge – that of slowing demand. While auto OEMs face similar challenges. dreaded to remain weak even in the near term. Component suppliers to the domestic replacement market have also been experiencing moderation in growth. the year 2012-13 has turned out to be worse as other segments too including the domestic Two-Wheeler (2W) segment as also exports to overseas OEMs and tier-1 players have come into the grips of the slowdown. While the revenue growth of diversified auto component manufacturers had been steady till Q1 2012-13. the across the board weakness in demand witnessed during the last two quarters has tended to neutralize this structural advantage otherwise enjoyed by such players.shone bright. the importing entities do remain exposed to forex risk on unhedged payables (as also on exports receivables). exchange rate volatility may be here to stay. firm interest rates and inflation in other overheads including employee costs and power costs. The balance sheets of several auto component manufacturers feature ECBs. While interest costs of most players have stayed high in the last several quarters. Net Profits One of the primary reasons for the subdued net earnings growth of auto component manufacturers since Q2 2011-12 has been adverse currency movements. as expected. given the long payables cycle with overseas suppliers (30-90 days payment cycle). the auto component manufacturers were grappling with a rising cost structure arising from volatile currency movements. While the currency cycle supported the industry in short periods. In the current uncertain global environment. Decline in revenues (on YoY basis) had significantly hurt both profits as well as margins of auto component manufacturers in Q2 and Q3 2012-13. besides revenue accretion due to corporate actions such as acquisitions and amalgamations. since raw material cost environment was relatively benign. the revenue growth of select auto component manufacturers has been much higher than the industry’s on the back of market share gains. besides an uncertain global economic environment resulting in slow automobile demand recovery and hence faltering export volumes. the profitability of auto component manufacturers may be hit harder due to their smaller scale of operations and limited operational and financial flexibility. has been relatively more resilient if not fully immune. While there has been no significant change in character of any of the above forces during 2012-13. and that too across the board. Over the short term. This apart. we expect the auto component industry’s revenue growth to r emain weak in the absence of immediate demand triggers for end-users across domestic automotive segments.domestic OEMs. going forward.

who due to their smaller size suffer from lower bargaining power and weaker access to capital. However. the quantum of capex otherwise planned to be incurred by auto component manufacturers over the near term remains conservative with several entities deciding to significantly scale-down the capex from the levels earlier budgeted. the industry. may be exposed to refinancing risks.Capital Expenditure Plans The capacity expansion programme of auto component manufacturers generally tends to follow that of their key customer OEMs. In the absence of sufficient cash flow generation visibility. their respective suppliers of key components are also currently at various stages of making investments in close proximity to these new facilities or in the OEMs’ vendor parks. As per ICRA’s estimates. we do not expect any major incremental term debt burden to ride on the balance sheet of auto component manufacturers over the near term. ICRA LIMITED P age |4 . With the industry going slow on investments towards capacity expansion. in our view. and Honda Motorcycles and Scooters being in the process of establishing a new plant near Bangalore. the above greenfield investments may entail total investments of Rs. Hero MotoCorp and Ford. 70 billion to be incurred by auto component manufacturers over the next three years. initiatives such as the proposal to enhance the refinancing capability of SIDBI as well as the recent MoU signed between ACMA (the apex body of auto components industry) and SIDBI to provide easier credit access to the former’s members are likely to provide benefici al support to smaller entities in the automotive value chain. These investments apart. The prevailing weak demand environment has had a more deleterious impact on lower-tier auto component manufacturers. With OEMs such as Maruti Suzuki. the large debt-funded capital expenditure executed by auto component manufacturers during the boom period of 2009-10 and 2010-11 means that repayment obligations of the term loans availed then will fall due now. planning to establish greenfield facilities in Gujarat. In this context.

Shivakumar Mobile: 9821086490 3rd Floor. Animesh Bhabhalia Mobile: 9824029432 907 & 908 Sakar -II.20. Kasturba Gandhi Marg. 498 Anna Salai. L. Mumbai . Vinita Baid Mobile: 9007884229 A-10 & 11. CTS 3202. Vinod Mobile: 9940648006 5th Floor. Shivakumar Mobile: 9821086490 5A. 10th Floor. 22831411 Fax: +91-33-2287 0728 E-mail: vinita. 26. Murphy Road. M. 11 Floor. Gurgaon 122002 Ph: +91-124-4545300. Kailash Building. Tower A. 12-14. Level 2. A. Kolkata . D. Fax:+91-79. Shivajinagar.380006 Tel: +91-79-26585049/2008/5494. Jayanta Chatterjee Mobile: 9845022459 'The Millenia'. 23737251 Fax: +91-40. DLF Cyber City. 25560195/196. 210.20. Tel: +91-40-23735061. Ahmedabad. L. 4545800 Fax. 234/ 3A. Nandanam. Phase II. Bose Road. Prabhadevi.com ICRA LIMITED P age |5 . Ameerpet. Fax: +91-80-43326409 E-mail: jayantac@icraindia. Vivek Mathur Mobile: 9871221122 Building No.com PUNE Mr. Unit No.2373 5152 E-mail: adityamsk@icraindia. 1004. 2nd Floor.560 008 Tel: +91-80-43326400. Bangalore .Please contact ICRA to get a copy of the full report CORPORATE OFFICE Building No. CONCOURSE. Aditya Mobile: 9963253777 301. FMC Fortuna. Tower A.com d. S.700020 Tel: +91-33-22876617/ 8839.com AHMEDABAD Mr. 1 & 2. Electric Mansion. Karumuttu Centre. Fax : +91. 8. 22800008. Pune-411 020 Tel : +91. Jayanta Chatterjee Mobile: 9845022459 Mr. Phase II.C. Appasaheb Marathe Marg.S.com HYDERABAD Mr.com CHENNAI Mr. No.J.K. 3rd Floor.com GURGAON Mr. New Delhi – 110 001 Tel: +91-11-23357940-50 Fax: +91-11-23357014 MUMBAI Mr. Symphony. 8. No. Ellisbridge. Tel: +91-44-45964300. Tower B. Gurgaon 122002 Ph: +91-124-4545300. 5th Floor.2648 4924 E-mail: animesh@icraindia.com BANGALORE Mr. 2nd Floor.2553 9231 E-mail: shivakumar@icraindia.baid@icraindia. +91-124-4545350 E-mail: vivek@icraindia. 4545800 Fax.400 025 Ph : +91-22-30470000. 3rd Floor. +91-124-4545350 REGISTERED OFFICE th 1105. Range Hills Road.com KOLKATA Ms.vinod@icraindia. Hyderabad 500 016.25561194. Chennai-600035. 24340043/9659/8080 Fax:91-44-24343663 E-mail: jayantac@icraindia. 24331046/53/62/74/86/87 Fax : +91-22-2433 1390 E-mail: shivakumar@icraindia. DLF Cyber City. 7-1-58.

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