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Indian Auto Ancillaries Industries Report

Overview

Described as the ‘sunrise industry of India’, the auto ancillary industry is highly fragmented with 500 organized and 5,000 unorganized players with over 60% of exports to Europe and USA. The market for auto components can be classified into Original Equipment (accounting for around 40% of demand), Replacement Market (accounting for around 50% of demand) and export market (accounting for the balance 10%).

Indian Auto Industry - Overview

The Indian auto industry is highly competitive with the presence of a number of global and Indian auto companies. India is the world’s second largest manufacturer of two wheelers and ninth largest car manufacturer. Automobile production has consistently shown an upward trend, growing at a CAGR of ~10% over 2002-2009. Automobile production including Passenger Vehicles, Commercial Vehicles, Three Wheelers and Two Wheelers stood at 11.2 million
units in 2008-09, almost double the figure of 6.3 million units in 2002- 03.

During October 2009, sales of Honda, Ford, Skoda, Hyundai and Maruti increased by 347%, 98%, 97%, 41% and 21% y-o-y, respectively. The momentum in sales of automobiles shows buoyancy in demand.

With improving road infrastructure, higher per capita income, favorable interest rates and launch of new models, the demand for automobiles and hence production is forecasted to be on the rise over the coming years Indian auto component industry is expected to grow to US$33-40 billion by 2015 based on buoyed growth in auto industry. In 2008-09 the turnover of the auto sector (automobiles and auto ancillaries) stood at INR2,190 billion with the ancillaries industry accounting for ~50% of the total turnover. India supplies a range of high-value and critical automobile components to global auto makers such as General Motors, Toyota, Ford and Volkswagen. Some of the leading manufacturers of auto components in India include Apollo Tyres, Bosch Ltd, Exide, CEAT, Bharat Forge, Motherson Sumi.

India compares favorably with other low cost countries in labour cost. Power cost constitutes only 3% of total cost structure, hence India’s high power cost compared to other low cost countries is not a significant disadvantage. Indian manufacturers lag their counterparts in terms of high fuel costs and higher taxes. However, with continuous growth in this sector and increased competition from foreign players, the government might structure the taxes more favorably for the benefit of component manufacturers. For example, the government lately announced an excise duty reduction of 4% across automobiles. High fuel cost is solely an economy driven factor and with global recession calming this might not be a significant cause for worry.

The demand for auto batteries is expected to grow at 7-8% per annum over the next couple of years driven by strong growth in replacement market. Presently, the Indian storage batteries market is estimated at INR90 billion. Of this, automotive batteries account for INR53 billion and industrial batteries for INR37 billion. The domestic organized sector accounts for 75% of the total batteries market with the unorganized sector taking the remaining share.

Several commercial vehicle manufacturers have identified India as manufacturing base for their export market which might lead to a higher demand for Indian batteries. This would help expand the market base for automotive batteries manifold.

The replacement cycle of a battery depends on application and usage pattern of the vehicles. Batteries typically last at an average of more than 3 years in a vehicle. The recovery in overall demand of vehicles would continue to fuel replacement demand for batteries ahead.

The Indian tyre sector outperformed the BSE Sensex during Q2 2010 over Q2 2009 and is expected to grow at a CAGR of 6-7% for the 2008-09 to 2013-14 period. The Indian tyre industry currently comprises of around 40 players in the organized and unorganized sectors. It is mainly dominated by the organized sector and consists of four major players including Apollo Tyres, MRF, JK Tyre and CEAT, which together account for 85% of the industry’s turnover. There are many other companies with a focus only on one or two categories of tyres, tubes and flaps primarily for the replacement market. Commercial vehicle tyres
account for ~70% of the industry’s turnover.

Raw material costs account for nearly 75% of total operating costs, particularly natural rubber which accounts for 40% of total raw material cost. Natural rubber prices are expected to remain higher during H2 2010 but players expect to report better numbers on overall growth in demand and ability to partially pass on raw material costs.

During April-July 2009, there was a surge in turnover in the replacement market driven by a growth of ~47% in truck & bus segment. The replacement market constitutes nearly 50- 51% of the tyre consumption followed by OEMs (43-44%) and the remaining exports. In the replacement market, truck and bus tyres posted a production growth of 11%, passengercar tyres 15%, LCVs tyres 10%, two-wheeler tyres 15% and farm tyres 20% during H1 2010 compared to H1 2009. Profitability is highest in the replacement market hence companies
vie to increase their share of this market.

Products

Since an auto assembly involves large number of parts, ACMA has classified sector companies on the basis of components that they supply to auto manufacturers. The pie chart describes the industry segmentation on the basis of range of products manufactured and their contribution to the overall industry revenues.

Recent Trends

The industry had been hit hard by the slowdown in domestic sales and exports. The imports in the recent past have increased manifold. A large number of auto ancillary companies witnessed sharp decline in profitability and are also facing severe problem of nonavailability of working capital. The Department of Heavy Industry has recommended an INR10 billion Automotive Development Fund to help in financing the modernization of the auto-ancillary industry

Presently, the production is on a recovery path buoyed by the pick up in sales of passenger cars and two wheelers. Alongside, the investment climate has improved since January this year. The revival process is expected to gain momentum in 2009-10. According to CMIE, ancillary production is expected to grow by 8.2% in 2009-10 aided by a 7% growth in the OEM segment and an 8.5% rise in exports & replacement market segment.

Global Scenario

The global auto ancillary industry is expected to reach US$1.9 trillion by 2015, of which around 40% (US$700 billion) is potentially expected to be sourced from low cost countries including India. With American automakers selling some of their brands and shift in the US consumer interest towards smaller and fuel-efficient cars, there are unique opportunities for the manufacturers in India and China to enter the North American automotive market Following the liquidity crisis starting September 2008, there was a rapid and sudden drop in orders in European market including incoming orders for future demand. The passenger car segment witnessed a reduction in demand. The drop in demand across sectors is expected to be more pronounced in CY2009 as the full effect will be evident.

Auto sales in Japan reversed a yearlong slide in August, rising 2.3% as government subsidies and tax cuts helped lift demand for Toyota’s new Prius and Honda’s Insight cars. The Japan Automobile Manufacturers’ Association expects domestic industry-wide sales to drop 8.5% to 4.3 million vehicles in the year ending March 2010.

Demand Drivers

-Infrastructure development (US$500 billion) in the next 5-6 years
-Low penetration rate of cars (8/1000) and access to capital
-Rising per capita income
-The middle class is expected to grow from 50 million to 550 million by 2025
-Continuously improving quality resulting in export of automobiles and auto ancillaries
-Low cost of skilled manpower and design capability

Investments – Foreign and Domestic

Continental Automotive Components (India) Private Limited, a wholly-owned subsidiary of Continental Corporation, is planning to invest over US$79.2 million in its Indian operations during the next two years ending December 2010

Canadian auto component major Magna International Inc is mulling options to set up an integrated manufacturing facility in or its nine business divisions

Shriram Pistons announced investing more than INR2.25 billion over two years in a new plant in Rajasthan and Rico Auto plans to spend about INR0.4 billion on
equipment this year to boost capacity in some segments

An auto park is coming up near Hyderabad with investments worth over US$409.3 million from around 34 automotive ancillary units. This is in addition to a US$245.6 million Greenfield project being set up by MLR Motors near the park

JK Tyres is investing US$53.8 million in a new facility in Mysore for off-the-road (OTR) tyres

Of the total 141 projects outstanding, 34 are expected to be commissioned by June 2010. Several luxury car makers are looking at making India a sourcing hub for components; BMW is likely to sign the first direct sourcing deal with local vendors by the end of this year. Skoda Auto India is looking at increasing localization for its small car Fabia to over 50% over the next two years. Mercedes Benz India expects growth in sourcing from India to continue at 10%.

Capex Plans

Auto component companies have lined up capex plans of nearly INR10 billion for FY09-2010: Minda Industries is setting up new plants in Vietnam, Pune, Bangalore and Manesar this year at an investment of INR2-2.5 billion
Sona Koyo has invested INR3 billion to set up new facilities under its recent joint
ventures with JTEK, FUJI, Americam Axel and Arjun Stampings this year. Plans to invest INR0.40 billion during the remaining period of the fiscal especially for upgrading its R&D Rico Auto has invested INR0.60 billion in this fiscal and plans to invest another INR0.40 billion in the remaining half on the new models

Recent Events

On September 03, 2009, Fiat announced sourcing of more than US$1 billion worth components for its global businesses in 2010 from India

On August 27, 2009, Motherson Sumi System bagged a contract worth INR40 billion from a group of German car makers to supply rear-view mirrors for six years. It has bagged the contract through its subsidiary Samvardhana Motherson Reflectec and the delivery is slated to begin from 2011

On August 24, 2009, Mando India announced that it has been selected by Mando Corporation to supply brake and suspension components for several of its global OEM customers including Volkswagen and Renault

On August 20, 2009, Bridgestone announced setting up a second facility near Pune at an investment of INR20.5 billion

On July 10, 2009, French tyre major, Michelin, gained clearance from the Foreign Investment Promotion Board for its US$2.26 billion FDI proposal to set up a manufac turing facility in Tamil Nadu

Future Outlook

As per an Automotive Component Manufacturers Association of India (ACMA) report, the industry is expected to touch US$40 billion by 2015-16. Investments were estimated at US$7.2 billion in 2007-08 and are likely to touch US$20.9 billion by 2015-16. It is estimated that exports of auto ancillaries would reach around US$20 billion-US$22 billion by 2015-16. The Investment Commission has set a target of attracting foreign investments worth US$5 billion for the next seven years to increase India's share in the global auto ancillaries market
from the existing 0.9% to 2.5% by 2015.

Key Concerns

The entry of SAIC (Shanghai Auto) into the Indian market might increase competition for several Indian players. The challenge could come in the light truck segment and even cheaper costs.

Trade agreements signed with countries like Thailand and China which already offer a number of incentives to their domestic players, are perceived to be a potential threat to India

Labour unrest has become an aggravating problem adversely affecting some companies including Rico Auto, Pricol, Sunbeam Auto. Problems of re-instating sacked workers, hiring of contract workers and non-payment of pay are some of the factors causing unrest between management and workers.

The industry is facing about 18-20% cost disadvantage in the form of increasing raw material costs, power costs, higher taxation and infrastructure costs when compared to China and Thailand

With the increasing input costs and automobile designs getting changed frequently, component manufacturers are required to constantly invest to upgrade themselves and to add value. This has been a drag, especially on small and medium manufacturers who have been found wanting in terms of servicing huge orders due to lack of scale. The auto components SMEs are facing stiff competition from companies in other developing countries like ASEAN countries

COMPANIES UNDER THIS SECTOR ARE MENTIONED BELOW-



Amara Raja Batteries : Maintaining Momentum

We rate Amara Raja Batteries a BUY. Amara Raja is engaged in manufacturing batteries for industrial and automotive purposes. It introduced Valve Regulated Lead Acid (VRLA) batteries for industrial usage. These batteries cater to the telecom sector and UPS back-up systems while other end-user segments include the Indian Railways and power utilities.

Major products straddle large, medium and small VRLA batteries catering to Original Equipment Manufacturers (OEMs) and the aftermarket. Conducts automotive batteries business through JV with Johnson Controls Inc. During Q2 2010, net sales increased by 6% y-o-y to INR3,606 million. PAT stood at INR479 million, recording a growth of 155% over Q2 2009.

Investment Highlights

Strong segmental growth. The industrial batteries business maintained its momentum and recorded a 50% CAGR over the last four years. As the company continued to enjoy a preferred supplier status among leading telecom operators and UPS manufacturers, telecom and UPS segments remained the main drivers of the industrial battery business. In automotive battery business, it tied up with Maruti. The company continued to weather the slowdown in the automotive industry owing to a continued focus on channel building and realigned product portfolio.

Rationalised approach. Amara Raja rationalized capital investment per unit in every successive brown field expansion programme through prudent planning and execution. It reinforced the business model through tactical revenue stream from institutional and retail segments. In the automotive battery business, it grew its presence among OEMs (volumedriven) & aftermarket (value-driven) and in the industrial battery business, it forged strong relationships with institutional customers both for original and replacement demand.

Robust balance sheet. Amara Raja created free reserves of INR3,885 million as ofMarch 31, 2009 and maintained a debt-equity ratio of 0.7:1 while utilizing less than 50% of its sanctioned working capital limit during 2008-09. A growing number of OEMs seek to partner with companies that possess strong balance sheet so that vendor companies can scale their capacities and upgrade product portfolio.

Amtek Auto – Restructuring Measures In Process

We do not rate Amtek Auto. Incorporated in 1985 and headquartered in New Delhi, its manufacturing capabilities include Iron and Aluminum Castings, Forgings, Complex Machining & Ring Gears Flywheel Assembly. Engaged in manufacture of 300 varieties of automotive components and assemblies with 34 production facilities spread across North America, Europe and Asia. It sells directly to automotive OEMs manufacturing 2/3 wheelers, passenger vehicles, commercial vehicles and to engine manufacturers. Major customers include Bajaj, BMW, Escorts, GWK, LG, LML, Toyota, Yamaha, Jaguar, Eicher and Aston Martin. During Q1 2010, standalone net sales decreased by 9% y-o-y to INR3,035 million. Standalone PAT stood at INR305 million, recording a decline of 37% over Q1 2009.

Investment Highlights

Economies of scale. The Board of Directors approved a scheme of merger of Amtek Auto Limited with three of its subsidiary companies; Ahmednagar Forgings Limited, Amtek Crankshafts (India) Limited, Amtek Ring Gears Limited and two group companies including Amtek India Limited and Amtek Castings India Limited. This is expected to improve economies of scale, further centralize main functions, optimize utilization of funds and strengthen balance sheet

Aggressive capex plans. The company carried out capital expenditure during the financial year ending June 2009, consisting of completing an aluminum casting facility and one machining facility, development of both had already commenced, with funds already committed. It also needs to make certain maintenance capital expenditures on continuous basis related to its base of over 25 manufacturing facilities. Amtek recently entered into three additional Memorandum of Understandings for further JVs, for which advances for capital expenditure has been given.

Global reach. Sells to markets like Europe and US; sells in European & US markets through exports from Indian parent & group companies and through European subsidiaries & US subsidiaries. Product range spans entire Amtek Group product offering. Major customers in these markets include Jaguar, Land Rover, Ford, Audi, Mercedes, BMW, PSA and Renault.



Apollo Tyres – Robust Growth Trend

We rate Apollo Tyres a BUY. Headquartered in Gurgaon, it is a leading Indian tyre manufacturer with 3 manufacturing units in India, 4 in South Africa, 1 in the Netherlands and a greenfield facility currently underway in Chennai, taking current production capacity to around 1,200 metric tonnes per day. Produces automotive tyres for ultra and high speed passenger cars, truck & bus, farm, off-the road, industrial & specialty applications like mining, retreaded tyres. Exports to over 70 countries from India, South Africa and Europe under brands like Apollo, Vredestein and Dunlop with India accounting for ~70% of revenues. During Q2 2010, standalone net sales increased by 24% y-o-y to INR12,203 million. Standalone PAT at INR1,021 million recorded growth of 1311% over Q2 2009.

Investment Highlights

Leadership in commercial vehicles segment. Apollo’s leadership position in the commercial vehicle segment enables it to leverage new and related business opportunities. It has already started leveraging these opportunities with new product segments like Truck/Bus Radial (TBR), Off-The-Road (OTR) tyres, retreading and allied automotive services. Growth within India also supports its aim to be a leader in the global industry and partake in overseas markets likeEurope.

Inorganic growth. Apollo is growing with acquisitions in international markets. In May 2009, it acquired Vredestein Banden in the Netherlands which has a high end passenger car tyre manufacturing facility and extensive access to the European market. In April 2006, it acquired Dunlop Tyres International (since renamed Apollo Tyres South Africa Pty Ltd), comprising three tyre manufacturing units and a retreading plant in Southern Africa. It holds brand rights for the Dunlop brand across 30 African countries.

Diversification benefits. Apollo plans to extend its leadership beyond commercial vehicle tyres to other segments. It announced a passenger car radialgreenfield project in Chennai to cater to small car tyre segment, which will enhance its participation in this sector. It finalized an agreement with BEML for producing and supplying OTR tyres to them. Apollo successfully launched Regal truck and bus radial tyres (TBR) last year and is now moving towards expanding its TBR capacity to meet increasing radialisation levels in this segment.

Bharat Forge – Value Creator

We rate Bharat Forge Ltd (BFL) a BUY. Flagship company of Kalyani Group, BFL is engaged in manufacturing forged and machined components for the automotive and non-automotive sectors. It is the largest exporter of auto components from India and leading chassis component manufacturer in the world. Manufacturing operations spread across 12 locations and 6 countries including four in India, three in Germany, one each in Sweden, Scotland, USAand two in China. Manufactures specialized components for the aerospace, power, energy, oil & gas, rail & marine, mining & construction equipment and other industries. During Q2 2010, total income decreased by 48% y-o-y to INR7,107 million. BFL recorded net loss of INR407 million due to restructuring costs and redundancies charged.

Investment Highlights

Diversification into energy sector. As part of its strategy to migrate from a component manufacturer to a supplier of components & systems for the capital goods sector, BFL has identified the Energy sector (Wind, Thermal, Hydro & Nuclear) as a huge opportunity. It is proposing JVs with NTPC, Alstom and Areva to manufacture Balance of Plant for power sector, Turbines & Generators for sub & super critical power plants and heavy forgings for both nuclear & conventional power plants & other capital goods sectors.

Focus on automotive and non-automotive segments. By 2007-08, BFL had significant presence in engine and chassis components with a customer base comprising several OEMs. During this period of growth, it focused primarily on automotive forgings. After establishing itself in this market it diversified into non-automotive forgings. This move further de-risked the business and opened up opportunities of growth in large global market segment. Consequently, large investments were made and capacity creation plans were rolled out for non-automotive forging operations at Baramati and Mundhwa in Maharashtra

Global presence. BFL is present across key markets like US, India and Europe. Due to bad market conditions, production and demand for vehicles showed a negative trend across all markets. However, with economy showing signs of revival, demand and subsequently production is expected to pick-up thus providing scope for further expansion and penetration across markets.

Bosch – Consistent Performer

We rate Bosch a BUY. Headquartered in Bangalore, Bosch Ltd is the flagship of the Bosch Group subsidiaries in India, engaged in supplying technology and services. Founded in 1951, the company is India’s largest auto component manufacturer and also one of the largest Indo–German company in India. Bosch Group holds close to 70% stake in Bosch Limited. Manufactures and trades in all three major business sectors including Automotive Technology, Industrial Technology and Consumer Goods & Building Technology through its facilities at Bangalore, Nash, Jaipur and Goa. During Q3 2009, standalone net sales increased by 2% y-o-y to INR12,968 million. Standalone PAT stood at INR1,948 million, recording growth of 23% over Q3 2008.

Investment Highlights

Expanded network in India. Bosch is represented by five other group companies in India including Robert Bosch Engineering and Business Solutions Ltd, Bosch Rexroth India Ltd, Bosch Chassis Systems India Ltd, Bosch Automotive Electronics India Private Ltd and Bosch Electrical Drives India Private Ltd. These companies are engaged in providing engineering & technology solutions for all the business sectors of automotive technology, industrial
technology, consumer goods & building technology for various automotive applications such as window lift drive, wiper system, engine cooling fans etc.

Future plan of action. The company has clear strategies to expand and grow in the future; its strategies include extending the product portfolio relevant to the low price vehicle segment, increase the lifecycle of the existing portfolio to meet some of the next levels of legislation, increase the depth of localization and increase in competencies across business sectors to take advantage of the potential in the Indian market.

Consistent performance. Bosch witnessed an overall growth of around 6.1% in sales during FY08 with growth primarily coming in the first three quarters of 2008. Good growth in automotive aftermarket division, power tools division and security technology divisions helped off-set some of the sharp slowdown seen in the automotive OE market in the fourth quarter. The company invested close to INR2,100 million during the year mainly in Common Rail System.

CEAT – Capacity Expansion

We rate CEAT a BUY. Leading tyre manufacturer engaged in manufacturing over 7 million tyres every year and commanding ~13% market share in India. Manufacturing facilities include three manufacturing plants, ten outsourcing units and three 2-3 wheeler plants controlled by CEAT. Caters to various user segments including heavy-duty T&B, LCV, Earthmovers and Forklifts (speciality segment), Tractors, Trailers, PC, Motorcycles / Scooters and Auto-rickshaws. Exports to more than 120 countries across Europe, Africa, Asia and has an established network in North and South America. During Q2 2010, net sales
increased by 9% y-o-y to INR7,145 million. Standalone PAT stood at INR615 million, compared to net loss of INR288 million during Q2 2009.

Investment Highlights

Strategic focus. CEAT expects to dominate in select segments in the domestic as well as in the export market. With globalization of the economy, new segments are getting created. It has chosen some key segments where it will focus its entire marketing activities in the future with a view to achieve leadership status. ‘Select and dominate’ will be CEAT’s strategy in all product categories especially premium categories. Further improvement in product mix and margins will be the key operational deliverables of the entire strategy.

Robust financial performance. CEAT has shown improved financial performance year over year. Sales have always been on rise since 2001 with a CAGR of 11%. It has sound capital base with substantial liquidity in hand. Exports registered a CAGR of ~18% during 2003- 2008 and are expected to be a major revenue driver in future also. Unprecedented cost push and subdued demand, however, reduced the margins of the company during the financial
year 2008-09.

Growing sales network. The company has a robust sales network consisting of 34 regional offices and over 3500 dealers. In addition, there are more than 100 CEAT shoppes, the exclusive outlets for urban customers. It has also implemented a new initiative during 2008-09 and has already opened close to 100 CEAT hubs, the exclusive outlets for addressing the needs of the Trucks & Buses segment. With these initiatives, CEAT’s direct reach to the consuming community is expected to grow significantly.

Exide Industries – Healthy Bottom-Line

We rate Exide Industries a BUY. Headquartered in Kolkata, India, the company was incorporated as Associated Battery Makers in 1947, now known as Exide Industries. Exide manufactures the widest range of storage batteries in the world from 2.5 Ah to 20,400 Ah capacities, covering the broadest spectrum of applications. It has six factories strategically located across India – two inMaharashtra, one in West Bengal, two in Tamil Nadu and one in Haryana. Acquired stake in various companies through years including Tandon Metals, Lead Age Alloys India, ING Vysya Life Insurance Company and Caldyne Automatics. During Q2 2010, net sales increased by 6% y-o-y to INR9,503 million. PAT stood at INR1,496 million, recording growth of 88% over Q2 2009.

Investment Highlights

Preferred supplier for leading auto companies. Exide enjoys a significant market share in the vehicle OEM segment. It has been identified as a supplier for batteries for Tata Motor’s ‘Nano’. Supplies of upgraded batteries for Tata Motor’s new model Vista has also commenced. It has also been nominated to supply batteries for Toyota’s small car as well as for the new models of Fiat D/200 and D/300. The company received an order for 5000 batteries for the Singapore Taxi market. Entered into technical collaboration with Changxing Noble Power Sourcing, China, for manufacture of Deep Cycling E-bike batteries for electric bicycles and scooters.

Strong foothold in all types of batteries. Due to its better reach and improved product perception, performance of industrial batteries segment has been satisfactory. In the submarine batteries segment, it received an order from the Indian Navy and an order from the Admiralty Ship Yard of Russia for third country exports. Exide continues to maintain its leadership position in India andSouth Asia.

Global presence. Exide relies on domestic as well as export market for its revenues. It has entered into arrangements with Indian Oil Corporation, Hindustan Petroleum Corporation and Toyota Kirloskar for distribution of its products through their retail outlets. Similar additional linkages are also being explored. This enables it to have a much larger presence across the country including all B and C class towns.

Federal-Mogul Goetze – Turnaround Story

We rate Federal-Mogul Goetze a BUY. Established in 1954 as a JV with Goetze-Werke of Germany. The company is the largest manufacturer of pistons and piston rings in India varying from 30mm to 300mm diameter through its facilities at Bangalore, Patiala and Bhiwadi. Caters to wide range of applications including two/three-wheelers, cars, SUVs, tractors, light commercial vehicles, heavy commercial vehicles, stationary engines and high output locomotive diesel engines. Goetze and Goetze Brico provide leading-edge technologies and competitive solutions for original equipment manufacturers and the automotive aftermarket. During Q3 2009, net sales increased by 17% y-o-y to INR2,044
million. PAT stood at INR237 million, which showed a robust growth compared to net loss of INR29 million during Q3 2008.

Investment Highlights

Balanced approach. It operates mainly in two segments i.e. OEM’s and the aftermarket. It is working towards stabilizing revenue and grow its market share presence in the product lines where it competes. This means OEM’s, OEM spare part market share expansion and continuing to drive additional share growth and market penetration in the aftermarket. Having a balanced approach to the OEM’s and aftermarket helps it in capitalizing on its strengths in both segments and to react to market fluctuations and customer strategies.

Drive for sustainable growth. Federal-Mogul continues its drive for sustainable growth by focusing on the long-term and expects that the current down turn will result in consolidation opportunities. It is adapting to successfully compete in difficult market conditions. It expects to revitalize in near future and is preparing for growth as consumers regain confidence and vehicle demand increases.

Wide distribution network. The company has a wide distribution network and is a major player in the pistons segment. It manufactures diverse range of piston and piston rings with industry leading OE activity and a strong aftermarket business with widely recognized brands and a strong distribution network. It is adapting through technology up-gradation to successfully compete in difficult market conditions.





Halonix – Gradual Rebounding

We do not rate Halonix. Formerly, known as Phoenix Lamps, Halonix is engaged in manufacturing compact fluorescent lamps and halogen lamps, suitable for commercial as well as residential establishments. Set up five fully integrated manufacturing plants at Noida, Haridwar and Dehradun with an investment of US$70 million. It executes bulk orders with a collective capacity of producing over 150 million lamps annually. Halonix saw change in ownership in 2007 when it was taken over by Actis, a private equity player. It exports its products to more than 75 countries including Europe, US, Australia, Middle East
and Latin America. During Q2 2010, net sales increased by 18% y-o-y to INR1,319 million. PAT stood at INR36 million, recording a decline of 34% over Q2 2009.

Investment Highlights

Expansion into new markets. Company’s new unit at Haridwar provides an additional advantage in terms of quality, quantity and cost competitiveness over its rivals. It has expanded exports of automotive lamps to new markets like US,Europe, Kuwait and Nepal. Further, developed new markets during the year atKuwait, Nigeria and Nepal. More markets are expected to open up in future. It is also constantly introducing new range of products like LED, HID, Sparkle and fixtures & fittings for new generation lamps. This expansion and introduction of new products will enable it to command better margins than its competitors.

Leader in its segment. Halonix is s market leader in automotive halogen lamps in India with supplies to all major OEMs in 4-wheeler and 2-wheeler industry. It is also a major exporter to developed countries. It faces less competition from its rivals because of its reach and range of products.

Positive outlook. The government thrust on development of infrastructure & housing sector as a whole and use of energy efficient lamps is expected to further boost demand for the products of the company. Compact Fluorescent Lamps (CFLs) are expected to witness growth in the near future. Halonix has taken various steps to rationalize its operating cost as well as to manage its current assets better which should improve both profitability and capital efficiency.



Motherson Sumi Systems – Declining Margins

We do not rate Motherson Sumi Systems (MSSL). Motherson Sumi Systems is the flagship company of Samvardhana Motherson Group. It is engaged in manufacturing of Electrical Distribution Systems (EDS) and Polymer Processing. Provides a complete range of services from design to manufacture, supplies and logistics to consumers in India and abroad. It is the largest manufacturer of rear view mirrors for passenger cars and MUVs in India with a 45% share in this segment. Caters to Material Handling, Earth Moving and Farm Equipment, White Goods & Electronics, Elevators, Office Automation and Medical Equipment industries with presence in 20 countries across the globe. During Q2 2010, net sales increased by 252% y-o-y to INR15,878 million. Net loss stood at INR37 million, compared to net profit of INR424.5 million during Q2 2009

Investment Highlights

Provider of diverse solutions. From design to manufacturing, Motherson possesses the ability to provide end-to-end solutions supported by logistical solutions. MSSL and its joint ventures have been partners in the design and development of wiring harnesses, plastic components, tooling and mirrors to leading automobile manufacturers in India. It also has a high degree of backward integration for key inputs along with a well diversified vendor base. This diversification has strengthened MSSL’s ability to de-risk its business model and
emerge as an increasingly profitable company.

Market share. MSSL pioneered the introduction of integrated wiring harnesses and wood stock door trims in India. It accounts for the largest share of passenger car wiring harnesses (65%) and automotive wires in India. It is among the largest plastic component suppliers to the automotive industry. It is the largest OE manufacturer of rear view mirrors for passenger cars in India with 45% market share.

Integrated solutions and alliances. The strength of MSSL lies in its ability to integrate diverse products and technologies into comprehensive solutions provided by its numerous manufacturing bases. It offers contemporary products using latest technologies through business-enhancing collaborations. MSSL has collaborated with 10 international partners from five countries.

Rico Auto – Operational Problems

We do not rate Rico Auto. Rico Auto is an engineering company supplying a wide range of high precision fully machined aluminum and ferrous components & assemblies to automotive OEMs across the globe. Its integrated services include design, development, tooling, casting, machining and assembly across ferrous and aluminum products. It has JVs with FCC for Clutch System, Continental Automotive for Hydraulic Brake System, Magna Powertrain for Oil & Water Pump System and Jinfei for Alloy Wheels. Rico’s key customers include Hero Honda, Maruti Suzuki and Honda motorcycles. During Q2 2010, standalone net sales decreased by 6% y-o-y to INR1,803 million. Standalone PAT stood at INR27 million, recording growth of 338% over Q2 2009

Investment Highlights

Aggressive growth plans. Rico’s strategy of focusing on new programs for small to mid sized vehicles in its global customer base, have resulted in a positive demand for its components. While the off take of commercial vehicles and off road segment where it supplies to Cummins and Caterpillar is still down, it is expecting schedule increases from customers like GM, Ford, Volvo, Honeywell and Nissan. In addition, company’s new business launches with Jatco for Japanand BMW for Europe are moving on track. It is targeting to grow its exports by over 30% in the current year 2009-10.

Focus on strategies. Rico is focused on its strategies for growth which include increasing its market penetration, developing non-automotive business, changing its product mix towards complex high value adding products, improving the manufacturing yields of all its products, and releasing capacity on its equipments through technical innovation so that it can launch new business without significant capital expenditure.

Robust plans for passenger car segment. The company is pursuing aggressive growth in passenger car segment with Maruti Suzuki both in terms of volume growth of existing products and adding new products. During 2008-09, it launched several new parts with Maruti. It started supplies of aluminum high pressure die cast cylinder blocks for Tata Motors Nano. Rico is the first company outside OEMs to manufacture aluminum cylinder blocks. Also during the current year, it has started component supplies to Fiat India.
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