February 1, 2012

February 1, 2012

Auto Parts Industry Catches Slowdown Flu

Policy & Research Unit

February 1, 2012

S lowdown in automobile sales has dented growth of the auto-

mobile parts industry in India. Data from Central Statistical

Organisation show growth in output of automobile ancillaries

slowed down sharply to 14.9% in April-November 2011, on a year

-on-year basis, from 32.3% growth in the previous year.

Automobile sales had registered robust growth in 2009-10 (April-

March) after the financial crisis of 2008. The buoyancy continued

in FY11 as well. It is only in the current financial year that some

segments of the industry — mainly passenger vehicles and heavy

commercial vehicles — are feeling the pinch again.

Slowdown in automobile sales in the current financial year re-

sulted in faltering growth for the automobile ancillary industry.

Automobile ancillary industry in India has traditionally been de-

pendent on a few large original equipment manufacturers for or-

ders. Some of these companies supplied solely to one auto manu-

facturer or supplied only to a particular market.

Large auto companies on which automobile ancillary companies

are overly dependent for orders include Maruti Suzuki Ltd, Hyun-

dai Motor India Ltd, Mahindra & Mahindra Ltd, Tata Motors Ltd,

Hero Motocorp Ltd and Bajaj Auto Ltd.

While depending on few auto companies for orders has been a

feasible business model, lack of expansion to multiple buyers and

multiple geographies increased the associated business risks for

auto components companies.

Slowdown in the Indian automobile industry, therefore, resulted in

a direct hit on growth of auto ancillary companies.

Demand for auto components has also been affected because of

labour unrest at the Manesar plant of Maruti Suzuki, the largest

Indian carmaker. Output at the plant has been affected since June

because of labour problems. In October, shutdown of the plant

reportedly resulted in a production loss of `300 crore.

It is only recently that auto parts companies have taken to diversi-

fying and entering new markets, mainly outside India.

While most automobile parts companies registered an overall

slowdown in revenues and profits, some companies managed to

record healthy growth.

D uring the first half of FY12, auto ancillary companies cater-

ing to two-wheeler and light commercial vehicle segments

recorded better growth compared with those dependent on medium

and heavy commercial vehicles and passenger vehicles segments.

Auto Parts Industry Catches Slowdown Flu

Table 1: Auto Ancillary Production

` crore % YoY

growth

Apr-Nov 2010 13,888 32.3

Apr-Nov 2011 15,952 14.9

Source: CSO

Two-wheeler, LCV Parts Suppliers Fare Better

Source: CMIE, Dhanbank PRU

Source: CMIE, Dhanbank PRU

February 1, 2012

Auto parts makers that either cater to export markets or have man-

aged to increase their market share in the non-automotive segment

registered healthy growth. Non-automotive segment includes

shafts and components for windmills, rotating components for the

aerospace industry, engine components for construction equip-

ments, marine and railways.

A metric by investment information and credit ratings company

ICRA shows that entities that score high on the diversification

parameter registered steady revenue growth in April-September

and in prior periods (Refer Table 2). According to the report:

“Diversification — in terms of customer base, segment mix, prod-

uct portfolio and geographical footprint — enhances a company’s

ability to overcome cash-flow variability across business cycles

and makes it better equipped to endure cyclical shocks”.

Revenue growth was healthy, albeit at a slower pace. However,

profitability across most companies took a hit. This is because

prices of key raw materials including rubber, steel, aluminium,

copper and plastics rose sharply in 2010-11. While prices of cer-

tain commodities softened a bit in the current financial year, lower

revenue growth adversely affected margins.

Besides slowing growth, high losses because of fluctuation in for-

eign exchange rates also dented profits of the industry.

Auto Parts Industry Capex Plans

Inspired by the high growth in automobile sales over the past few

years and expectations of healthy growth in the coming years have

prompted some ancillary companies to announce expansion plans.

According to data collected and published by the Centre for Moni-

toring Indian Economy, 75 projects worth `9,059 crore are sched-

uled for completion during 2011-14. Capacity expansion projects

worth `1,322 crore are under way in the mega industrial estate of

Maharashtra Industrial Development Corp in the Pune region.

Over and above these projects, nearly 60 French automobile com-

ponent makers are exploring possibilities of setting up a vendor

park at Sanand, near Ahmedabad. Ford, PSA Peugeot Citroen, and

Maruti recently announced plans to set up plants in Gujarat.

However, rising uncertainty about how long the downturn in the

auto industry would continue may prompt some companies to re-

consider their plans.

Table 2: Auto Component Makers That Maintained Steady Revenue Growth in Q2 FY12

Q2 FY12 Q2 FY12

Revenue Growth Revenue

Growth

Growth Drivers QoQ YoY Growth Drivers QoQ YoY

Exports Non-Automotive Segment

Bharat Forge 7% 28% Bharat Forge 7% 28%

Mahindra Forgings 19% 24% Omax Autos 1% 11%

Sundaram Fasteners 5% 17% ZF Steering (led by tractor segment) 6% 20%

Ceat 4% 33%

Diversification Benefits

(product/customer/geographic)

Market Share Gains or Improved

Realizations

Bosch -3% 17% Motherson Sumi 3% 17%

Sundram Fasteners 5% 17% Nelcast 2% 25%

JBM Auto 14% 12% Minda Industries 20% 31%

Source: ICRA, Capitaline Database, Dhanbank PRU

February 1, 2012

NSE Auto Index Fares Better

Vs Nifty in 2011

D uring calendar year 2011, the National Stock Exchange’s

15-share CNX Auto Index managed to fare better com-

pared with the broad-based 50-share S&P CNX Nifty index.

While the auto index registered a 19.5% fall, the Nifty con-

tracted 24.9% last year.

The auto index is designed to reflect the behavior and perform-

ance of the automobiles sector that includes manufacturers of

cars and motorcycles, heavy vehicles, auto ancillaries and tyres.

D ata from Automotive Component Manufacturers of India

show turnover of the automobile parts industry grew 27.4%

to `1,81,842 crore in FY11. The industry’s market size is ex-

pected to grow by a slower 11.8% in FY12. Weak demand from

domestic industry and slow growth in exports are likely to ham-

per growth in market size. Exports account for 13-14% of the

industry turnover.

Demand from Europe, which is one of the largest markets for

Indian auto components (accounting for more than 25% of total

exports), is likely to be slow in the second half of FY12.

Depreciation of the Indian rupee is expected to partially negate

impact of slower export numbers. Also, replacement demand for

components is likely to be high given the surge in number of

vehicles sold in the past few years.

Besides higher export revenue, depreciating rupee may push

companies to procure more components locally as imports be-

come dearer.

Honda India’s new small car Brio has used 80% local auto com-

ponents and the company expects to increase this to 90%.

Automobile manufacturers are also increasingly sourcing auto

components from India for their global operations. This is likely

to augur well for the industry’s growth.

PRU View: Growth to Slow Down Further in FY12

February 1, 2012

Sonal Thakur Senior Sector Analyst 022-61541840 Jones Koshy Senior Editor 022-61541764 Rajrishi Singhal Head – Policy & Research 022-61541730 Policy & Research Unit, Dhanlaxmi Bank, Trade View, Kamala Mills, PB Marg, Worli, Mumbai 400013

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