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Automobile Sector in India

After a decade of experiencing high growth, Indian automobile industry, which is the world’s
fourth largest automobile industry, is embracing a slowdown. Although the Indian economy is
growing at 7%, the auto industry is at its lowest level in the recent years and has been hit by
one of the worse sales slowdowns. This seems to be a result of a combination of huge inventory
reduction exercise as well as genuine demand softness. These factors raise doubts on the
industry’s ability to pass on the regulatory cost pressure without compromising on their
margins. While demonetization inconvenienced the sector, the more recent liquidity crunch
among non-banking financial companies (prime lenders to the automobile industry) also
weighed. The NBFC crisis had a twin impact on demand. It curtailed financing of new vehicles,
and also customers who were not preferred for financing by banks.

While NBFC crisis top the list of the reasons that led to this slowdown, other factors that also
contributed are:

 High fuel costs, sustained rise in commodity prices and changes in insurance norms
were the issues that dealt a blow to the sector in FY2019, affecting margins of
automakers.
 India’s upgrade from BS-IV to BS-VI by 2020 is set to make BS-VI compliant vehicles
more expensive. As a result, sharp increase in price of diesel vehicles and economy-
segment motorcycles is keeping buyers away for some time.
 Issues like muted demand and excess capacity have led to automakers in many
segments announcing production cuts.
 Stiff competition from growing organised pre-owned vehicle market

Current Situation of Indian Economy

The Reserve Bank of India (RBI) has reduced repo rate by 110 basis points to 5.4%, in the last 7
months, through four successive repo rate cuts. But India’s economy is in such a deep slump
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that lowering interest rates alone won’t fix the situation. It is important that benefit of these
rate cuts is passed on to the general public and companies through commercial banks lowering
their lending rates.

Another reason for Indian economy slowdown is the NBFC crisis that started in September 2018
when IL&FS Financial Services failed to meet its commercial paper redemption obligations and
other payment obligations of loans. This crisis has led to reduced credit flow in the economy.
Trillions of rupees are locked in real estate, construction and infrastructure projects.

Since a long time now, the consumer demand for automobiles, consumer durables and air
travel has been continuously declining. There is substantial excess capacity, as compared to
demand, in the manufacturing sector. Due to this unutilized capacity, temporary and casual
employees are being laid off (around 35,000 employees since April) and wage hikes are being
postponed, reducing levels of aggregate disposable income, which is further reducing demand.

HISTORY OF COMPANIES:

TATA Motors

Tata Motors Limited, formerly known as Tata Engineering and Locomotive Company (TELCO),
was founded in 1945. It is an Indian multinational automotive manufacturing company
headquartered in Mumbai, Maharashtra, India. It is a part of Tata Group, an Indian
conglomerate. Its products include passenger cars, trucks, vans, coaches, buses, sports cars,
construction equipment and military vehicles. Tata Motors entered the passenger vehicle
market in 1988 with the launch of the Tata Mobile followed by the Tata Sierra in 1991. In 1998,
Tata launched the first fully indigenous Indian passenger car, the Indica, and in 2008 launched
the Tata Nano, the world's cheapest car. Tata Motors is listed on the (BSE) Bombay Stock
Exchange, National Stock Exchange of India, and the New York Stock Exchange.

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Slowing domestic sales, issues related to Jaguar land rover and softness in the Chinese market
have resulted in net loss of ₹ 3,679.66 crore to TATA Motors for the first quarter of this fiscal
year. Also its total revenue from operations fell by 7.84 percent. In the past month, the sales of
TATA Motors passenger vehicles fell by 31%. This has been one of the worst sales slumps in the
Auto Industry of India.

SUBROS LTD.

Subros Limited, founded in 1985 is a part of Indian Auto Ancillary Components Manufacturing
Industry and is engaged in the business of manufacturing Automotive Air Conditioning Systems
for its various customers at its plants located in Noida, Manesar, Pune, Sanand and Chennai. It
is the leading manufacturer of thermal products for automotive applications in India. Subros
manufactures compressors, Condensers, Heat Exchangers and all connecting elements required
to complete AC loop and caters to all segments viz. Passenger Vehicles, Buses, Trucks,
Refrigeration Transport, off- roaders & Railways.

The Company is focusing on sustaining and further improving the performance for mid-term
and long-term strategies. Geographical expansion, product positioning, and efficiency
improvement are the pivotal aspects for future growth in the face of competition. Based on
customer demands, the Company is working on new technology development in-house or by
acquiring it from technology partner. The long-term technology roadmap is already envisaged
to meet emerging customer expectations, and work is in progress to launch the roadmap at an
opportune moment. Competency build up to meet the future technology challenge is another
strategic aspect wherein the Company is working aggressively.

JAMNA AUTO INDUSTRIES LTD.

Jamna Auto Industries was promoted by Mr. Bhupinder Singh Jauhar. He started the Tapered
Leaf Spring business in 1954 in a small shop in Yamuna Nagar which was converted in the
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company form in the year 1965.Jamna Auto Industries Limited is engaged in manufacturing and
selling of Tapered Leaf, Parabolic Springs and Lift Axles. The Company has its manufacturing
facilities at Malanpur, Chennai, Yamuna Nagar, Jamshedpur, Hosur, Pillaipakkam and Pune. It is
India's largest, and amongst world's third largest, manufacturer of tapered leaf springs and
parabolic springs for automobiles. The Company was first to introduce parabolic springs in
India. It is the market leader with 64% market share in the India OEM (original equipment
manufacturer) segment and produces over 410 modes of springs for OEMs.It pursues a policy of
continued technical excellence to deliver high quality products, assemblies and services to
customers. The Company's reflection on Quality Standards is the coveted recognition to highest
Quality Management System Standards for the Automotive Sector- ISO/TS16949:2009 - ISO
9001:2008

JAI has diversified its product range by adding Lift Axle and Air Suspension under technical
assistance with Ridewell Corporation, USA. Lift Axle and bogie suspensions are used for cargo
and Air Suspensions are used in low floor buses for a smooth ride and comfort. JAI has entered
into a technology transfer agreement and technical assistance agreement with Tinsley Bridge
Limited, UK for extra-lite spring technology and special steel technology.

Case Question:

The teams are provided with the data of TATA Motors, the company facing difficulty in running
the business and of two potential targets that can be acquired, which are Subros Ltd and Jamna
Auto Industries Ltd. Since, the automobile industry is facing a slowdown, auto ancillaries are
also not sure of their future as the demand of their products have decreased to a great level.
Hence, they are looking for a merger with a big company which might come to their rescue.

You are the Consultant from TATA Motors and you have 2 options of acquisitions i.e. ‘Subros or
Jamna Auto’ to choose from. You need to convince the board members of TATA as how this

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acquisition is beneficial and what is the current valuation they should offer. Also, explain the
synergy of this acquisition.

Guidelines:

 Justify the Rationale (Qualitative and Quantitative) behind your valuation and potential
buyer
 Financial data provided along with the case let shall only be used. (Excel attached file)
 The team can only consider one potential company for acquisition out of the two to
estimate the buying decision
 Each team needs to prepare a presentation and time allotted for each team would be 15
minutes (10 minutes for presentation and 5 minutes for Q&A)
 Maximum of 10 slides including Introduction and Thank You
 Use other sources such as money control, Bloomberg, value search online or any other
news material to substantiate the fair value estimation, if required. Sources of all
additional data should be mentioned

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