Maruti-Sell
Positives factored in. While Maruti Suzuki India (MSIL) would see robust volume growth in FY11, the lower EBITDA margin would wipe out such gains. Though capacity ramp-up would help counter production constraints by FY12-13, near-term production appears to have reached peak levels. On fair valuations, we maintain Sell. n Market-share gain despite intense competition. MSIL's 27.4% volume growth in 2QFY11 enabled the company to improve its passenger vehicle (PV) market share to 43%. This marks a second successive quarter of improving market share for MSIL. n EBITDA improves qoq. MSIL's adjusted EBITDA margin rose 130bp qoq on lower raw material-to-sales, which was 30bp more than expected. The higher royalty outflow (now a permanent feature of operating expenses) at 5.3% of net sales was 30bp higher than expected on unfavourable currency movement. n Lower estimates; introduce FY13e. We lower our FY11 earnings estimate 11.7% (and that for FY12 by 6.1%) on lower other income and provisioning for higher royalty payout. Also, we introduce FY13e EPS at `124 (a 20.9% yoy rise). n Valuation and risks. We retain our Sell rating based on fair valuations. We revise our target price to `1,539 from `1,375, based on target PE of 15x FY12e, an 11% premium to the past five-year average one-year-forward PE. Risks: Better car demand and sharp decline in commodity costs. |
Mahindra Satyam: Update
Rising staff cost drags Mahindra Satyam's Q2 profit
| Merger with Tech Mahindra will be delayed; to hire 9,000 more. |
Our Bureau
Hyderabad, Nov 15
Rising employee cost has dragged Mahindra Satyam's net profit down to Rs 23.3 crore in the second quarter ended September 30, 2010, against Rs 97.5 crore in the preceding quarter. It reported revenues of Rs 1,242 crore in the second quarter, marginally lower than Rs 1,248 crore in the preceding quarter.
For the year ended 2009-10, it ended up with loss of Rs 124.60 crore.
"The cost of employees has gone up significantly as we attempted to retain talent. This has led to the fall in profit. The number of employees had gone up to 28,000 from 27,722 during the period," Mr Vineet Nayyar, Chairman of Mahindra Satyam, said.
The cost of employees in the second quarter went up to Rs 913.6 crore (Rs 867.7 crore).
Higher attrition rate
Addressing a press conference here on Monday to announce the results for the first two quarters and make the company "current with accounting standards" in the country, he said attrition rate was as high as 25 per cent in tune with the industry average.
Mr Nayyar said the company would recruit about 9,000 people in the next two years. "In the next six months, we will take 3,000-4,000 people and hire 5,000 graduates in the next financial year," he said. Contrary to its earlier announcement, the company said the merger with Tech Mahindra would be delayed till the end of next year. "Consultations with various board members and law firms have begun. Advice (for merger) is still being firmed up.
The earlier indication of November 15 for merger process to be announced was too early," Mr C.P. Gurnani, Chief Executive Officer, said.
Approaches CBDT
Mr Nayyar said the company has appealed the Central Board of Direct Taxes (CBDT) for grant of stay of collection of all the tax demands for 2002-03 to 2007-08 till the correct quantification of income and taxes payable by the company was done.
The CBDT had raised tax demands for Rs 503 crore for the scam-hit IT services company.
The company refused to comment on the Maytas demand for return of Rs 1,230 crore advanced during the scam period, saying the matter was in court.
Final stage
The proceedings by the Securities and Exchange Commission (the US financial markets regulator) were in final stages. "We have made all submissions. The proceedings were at an ultimate stage," he said.
The BPO arm of the company reported a loss of Rs 1.3 crore each in both the quarters on revenues of Rs 27 crore and Rs 25 crore respectively.
M&M to hit MotoGP track for global bike
INDIA will debut in MotoGP, the world's premier motorcycle championship, next season when the country's youngest motorcycle maker Mahindra 2Wheelers enters the race that may give a big push to the company's marketing and brand-building efforts.
The two-wheeler arm of Mahindra & Mahindra will participate in the 125cc category of the world's oldest motorsports event started in 1949 and having 18 Grand Prix races across 14 countries from March 2011.
"This category (125cc MotoGP) is relevant to people in India as bulk of the bikes are in the 110cc and 125cc," said Anand Mahindra, vice-chairman and managing director of the Mahindra & Mahindra group.
"The advertising in the recent Football World Cup (for the group's technology arm Mahindra Satyam) made us understand the power of global branding and benefited the group. So this is an interesting sequential chapter to our global branding effort," he said.
Marketing experts believe the association with MotoGP will provide an ideal platform for Mahindra to showcase its two-wheeler technology and give its brand a boost in a market dominated by Hero Honda and Bajaj Auto.
"The participation in MotoGP will give Mahindra 2Wheelers a leap of a few years as compared to a conventional marketing route," said Jagdeep Kapoor, MD of Samsika Marketing Consultants. He said the association will give its products a jumpstart in the international market, while its domestic sales will benefit from the halo effect. "Mahindra & Mahindra will gain recognition and credibility in a highly competitive market," said Mr Kapoor.
Adil Jal Darukhanawala, editor of Times Zigwheels, said it is a big event for the country. "It will be a red letter day to see an Indian manufacturer turn out on the Grand Prix circuits with a bike of its own and fighting for technological brilliance against the elite," he said.
Mahindra & Mahindra, a leader in SUVs and tractor segments, entered the two-wheeler market with gearless scooters in September last year after acquiring Pune-based Kinetic and rode in to the motorcycle market this September with the 110cc Stallio and the 300cc Mojo.
"Since we are new in the motorcycle business, participating in such an event will help build the brand equity, showcase technology and will be a testing ground for technology that we will offer to Indian and global consumers," said Mr Mahindra. "It will enhance our entire automotive range, auto
components and IT
domains," he said.
MotoGP, established as a world championship by the Fédération Internationale de Motocyclisme, has three racing categories: 125cc, where the maximum engine displacement is 125cc; Moto2, the 600cc four-stroke engine category; and MotoGP, where competing bikes must be prototypes with maximum engine capacity of 800cc.
Mr Mahindra said his company will leverage the MotoGP platform to prove its engineering, design and endurance skills and compete with the best in the world. "We will be taking over an existing racing team and call them `Mahindra Racing Team'," he said.
M&M has submitted the names of its two bikers to the International Road-Racing Teams Association and Dorna Sports, which administrates and organises all Grands Prix, and is expected to hear from them by the month end.
The two-wheeler arm of Mahindra & Mahindra will participate in the 125cc category of the world's oldest motorsports event started in 1949 and having 18 Grand Prix races across 14 countries from March 2011.
"This category (125cc MotoGP) is relevant to people in India as bulk of the bikes are in the 110cc and 125cc," said Anand Mahindra, vice-chairman and managing director of the Mahindra & Mahindra group.
"The advertising in the recent Football World Cup (for the group's technology arm Mahindra Satyam) made us understand the power of global branding and benefited the group. So this is an interesting sequential chapter to our global branding effort," he said.
Marketing experts believe the association with MotoGP will provide an ideal platform for Mahindra to showcase its two-wheeler technology and give its brand a boost in a market dominated by Hero Honda and Bajaj Auto.
"The participation in MotoGP will give Mahindra 2Wheelers a leap of a few years as compared to a conventional marketing route," said Jagdeep Kapoor, MD of Samsika Marketing Consultants. He said the association will give its products a jumpstart in the international market, while its domestic sales will benefit from the halo effect. "Mahindra & Mahindra will gain recognition and credibility in a highly competitive market," said Mr Kapoor.
Adil Jal Darukhanawala, editor of Times Zigwheels, said it is a big event for the country. "It will be a red letter day to see an Indian manufacturer turn out on the Grand Prix circuits with a bike of its own and fighting for technological brilliance against the elite," he said.
Mahindra & Mahindra, a leader in SUVs and tractor segments, entered the two-wheeler market with gearless scooters in September last year after acquiring Pune-based Kinetic and rode in to the motorcycle market this September with the 110cc Stallio and the 300cc Mojo.
"Since we are new in the motorcycle business, participating in such an event will help build the brand equity, showcase technology and will be a testing ground for technology that we will offer to Indian and global consumers," said Mr Mahindra. "It will enhance our entire automotive range, auto
components and IT
domains," he said.
MotoGP, established as a world championship by the Fédération Internationale de Motocyclisme, has three racing categories: 125cc, where the maximum engine displacement is 125cc; Moto2, the 600cc four-stroke engine category; and MotoGP, where competing bikes must be prototypes with maximum engine capacity of 800cc.
Mr Mahindra said his company will leverage the MotoGP platform to prove its engineering, design and endurance skills and compete with the best in the world. "We will be taking over an existing racing team and call them `Mahindra Racing Team'," he said.
M&M has submitted the names of its two bikers to the International Road-Racing Teams Association and Dorna Sports, which administrates and organises all Grands Prix, and is expected to hear from them by the month end.
ANAND MAHINDRA VC & MD, MAHINDRA & MAHINDRA
Motor Insurance - Think Street Smart
Motor insurance is not just a legal requirement. Read the fine print before signing on the dotted lines to save money
AT A TIME when motown customers are facing heat over high fuel prices and soaring interest rates, shouldn't they strive to extract every penny they spend on their automobile purchase? Valid question, you may say, but most customers choose to ignore an important component while purchasing a vehicle — motor insurance. They just consider it a legal requirement without which they can't bring their new vehicle on road. Indeed, motor insurance is a necessity which covers you against damage to your own vehicle and damage to the third party.
Broadly, there are two types of auto insurance —
1) Comprehensive policy and
2) Third party insurance.
1) Comprehensive policy
In comprehensive insurance, you get full cover for every possible damage, including dents, technical problems, repair, accidents and even for car theft.
To make sure that an individual gets the best deal while buying an insurance policy, he/ she should make sure that the policy is a comprehensive one. The policy should have cover for the loss or damage to the vehicle or accessories due to natural calamities such as fire, explosion, self-ignition or lightning, earthquake, flood, typhoon, hurricane, storm, tempest, inundation, cyclone, hailstorm, frost landslide, rockslide, burglary, theft, riot, strike, malicious acts, accident by external means, terrorist activity, any damage in transit by road, rail, inland waterway, lift, elevator or air and others, head, motor insurance of ICICI Lombard. Too exhaustive a list, but you never know when an emergency would strike.
2) Third party insurance
In third party insurance, your cover is limited to the claims payable to the third party in case of an accident. Incidentally, third-party insurance is the only insurance compulsory under the law. The other type of insurance is called 'third party theft' insurance. Here the premium is less than comprehensive cover and you get insured for the theft of the vehicle. But make no mistake here. Consumers opting for this type of insurance don't get any cover for repairs and other damages.
Consumers should also keep in mind that third party insurance is mainly offered by government-owned companies such as General Insurance, New India Assurance, United India Insurance and Oriental Insurance. Though private companies such as Iffco Tokyo, Baja Allianz, ICICI Lombard, Royal Sundaram, Tata AIG and others also offer third party insurance, they generally don't push these since they are not very lucrative for them. Though none of the policies cover medical expenses, the Motor Insurance Tribunal covers medical claims on account of loss of salary income due to hospitalisation or any other disability. There exists a personal accident cover for individual owners under optional accident cover.
Now, once you have decided on which type of insurance you plan to take, you should be clear on some issues to enable you to take informed decisions. Though almost every dealer from where you buy your vehicle offers you insurance at the showroom only, you have the right to choose your own insurance company. You may be able to save some money by choosing a company different from your dealer as now different companies offer different rates and discounts with the de-tariff regime in place.
In this regime, insurance companies have the option to offer you rates lower than other players. Of course, you just don't have to jump the gun. Check various companies for the rates and discounts and then negotiate with your dealer. If you have a good history — like your vehicle has had no accident in the past or if you haven't claimed bonus in the previous years — then the auto insurance companies will give you further special rates. The region where the vehicle is bought also plays a role in deciding premiums as some locations have higher risk profiles.
Continuity of your vehicle insurance is also important. The gap in your insurance policy will not go well with insurance companies and you may have to shell out more premium. Also, always check if you have cashless facility and make sure that your nearby workshop or garage is covered under it. The cashless option will save you from the hassle of tedious claim reimbursement procedure.
Another must is that you should never take the agents' word for granted and ensure you get the best deal. Incidentally, companies such as ICICI Lombard and Bajaj Allianz also offer interest-free instalments for the premium payment if you are paying online.
So the next time you buy your dream car, don't forget to look into the finer points of insurance.
--
AT A TIME when motown customers are facing heat over high fuel prices and soaring interest rates, shouldn't they strive to extract every penny they spend on their automobile purchase? Valid question, you may say, but most customers choose to ignore an important component while purchasing a vehicle — motor insurance. They just consider it a legal requirement without which they can't bring their new vehicle on road. Indeed, motor insurance is a necessity which covers you against damage to your own vehicle and damage to the third party.
Broadly, there are two types of auto insurance —
1) Comprehensive policy and
2) Third party insurance.
1) Comprehensive policy
In comprehensive insurance, you get full cover for every possible damage, including dents, technical problems, repair, accidents and even for car theft.
To make sure that an individual gets the best deal while buying an insurance policy, he/ she should make sure that the policy is a comprehensive one. The policy should have cover for the loss or damage to the vehicle or accessories due to natural calamities such as fire, explosion, self-ignition or lightning, earthquake, flood, typhoon, hurricane, storm, tempest, inundation, cyclone, hailstorm, frost landslide, rockslide, burglary, theft, riot, strike, malicious acts, accident by external means, terrorist activity, any damage in transit by road, rail, inland waterway, lift, elevator or air and others, head, motor insurance of ICICI Lombard. Too exhaustive a list, but you never know when an emergency would strike.
2) Third party insurance
In third party insurance, your cover is limited to the claims payable to the third party in case of an accident. Incidentally, third-party insurance is the only insurance compulsory under the law. The other type of insurance is called 'third party theft' insurance. Here the premium is less than comprehensive cover and you get insured for the theft of the vehicle. But make no mistake here. Consumers opting for this type of insurance don't get any cover for repairs and other damages.
Consumers should also keep in mind that third party insurance is mainly offered by government-owned companies such as General Insurance, New India Assurance, United India Insurance and Oriental Insurance. Though private companies such as Iffco Tokyo, Baja Allianz, ICICI Lombard, Royal Sundaram, Tata AIG and others also offer third party insurance, they generally don't push these since they are not very lucrative for them. Though none of the policies cover medical expenses, the Motor Insurance Tribunal covers medical claims on account of loss of salary income due to hospitalisation or any other disability. There exists a personal accident cover for individual owners under optional accident cover.
Now, once you have decided on which type of insurance you plan to take, you should be clear on some issues to enable you to take informed decisions. Though almost every dealer from where you buy your vehicle offers you insurance at the showroom only, you have the right to choose your own insurance company. You may be able to save some money by choosing a company different from your dealer as now different companies offer different rates and discounts with the de-tariff regime in place.
In this regime, insurance companies have the option to offer you rates lower than other players. Of course, you just don't have to jump the gun. Check various companies for the rates and discounts and then negotiate with your dealer. If you have a good history — like your vehicle has had no accident in the past or if you haven't claimed bonus in the previous years — then the auto insurance companies will give you further special rates. The region where the vehicle is bought also plays a role in deciding premiums as some locations have higher risk profiles.
Continuity of your vehicle insurance is also important. The gap in your insurance policy will not go well with insurance companies and you may have to shell out more premium. Also, always check if you have cashless facility and make sure that your nearby workshop or garage is covered under it. The cashless option will save you from the hassle of tedious claim reimbursement procedure.
Another must is that you should never take the agents' word for granted and ensure you get the best deal. Incidentally, companies such as ICICI Lombard and Bajaj Allianz also offer interest-free instalments for the premium payment if you are paying online.
So the next time you buy your dream car, don't forget to look into the finer points of insurance.
--
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.
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.
India revs up global auto cos’ engine
After Suzuki & Honda, Hyundai Rides High On Desi Ops As Downturn Impacts Growth
Pankaj Doval TNN
New Delhi: The midas touch of India is clearly visible on the financials of global auto majors. Just like Japanese auto majors Suzuki and Honda, which get a sizeable portion of their revenues, sales and profits from their Indian subsidiaries, Korean car giant Hyundai too is increasingly banking on its Indian operations for adding weight to its business as numbers stay uncertain in developed markets due to the recession.
Hyundai, which started operations a decade ago and now enjoys a strong presence in India, said the country is playing a pivotal role in the company's global operations and is expected to contribute more to profits than even from China.
H W Park, the new MD & CEO of Hyundai India, said the Indian subsidiary contributes between 15% and 20% to Hyundai's global turnover. Asked about the profit, he refused to quantify, but said it is expected to be higher than China next year. The Indian subsidiary had been making profits for many years.
Park said unlike China, India has a unique position in Hyundai's operations as factories here not only service the domestic market but also cater to overseas markets in Europe.
"While China only sells domestic, India is used both for domestic and export markets.'' Higher profits, however, could be justified considering that the companies have to operate through a joint venture in China, while in India, solo operations are allowed which mean full repatriation of profits to the parent.
Hyundai, which is currently the second-biggest car maker in India behind Maruti Suzuki, has an annual production capacity of around 6 lakh units, half of which is used to service export markets. The company has earmarked India as one of the hubs for manufacture of compact models like i10, i20 and the Santro and sells the India-made cars to over 100 countries.
While developed markets in Europe and the US remain under pressure, operations in India have been growing. The company's cumulative sales in January-October 2009 period have grown by 12% year-onyear at 4.57 lakh units (4.07 lakh) with domestic sales up 11% at 2.39 lakh units and exports up 13% at 2.17 lakh units.
Hyundai is not the only company to benefit from a strong presence in India.
Suzuki trebled its full-year global net income forecast on the back of strong Indian operations, despite sluggish sales overseas. While home market Japan as well as European countries contracted for Suzuki, India remained the only market to grow, with first half sales here moving up by 24% at 4.7 lakh units against 3.8 lakh units in the corresponding period.
Honda is another company that is reaping benefits of an early entry into India. The company has been gaining due to its strong presence in the two-wheeler market. Its twin two-wheeler joint venture—Hero Honda and fully-owned Honda Motorcycle and Scooter India (HMSI)—are expected to contribute as much as 40% to global motorcycle production and also a sizeable portion of profits and revenues.
Golden Goose
Indian subsidiary contributes between 15% and 20% to Hyundai's global turnover and profit is expected to be higher than China next year
Suzuki trebled full-year global net income forecast on back of strong Indian operations, despite sluggish sales overseas. India remained the only market to grow
Honda's JV Hero Honda and own operations HMSI are expected to contribute 40% of its global production
Pankaj Doval TNN
New Delhi: The midas touch of India is clearly visible on the financials of global auto majors. Just like Japanese auto majors Suzuki and Honda, which get a sizeable portion of their revenues, sales and profits from their Indian subsidiaries, Korean car giant Hyundai too is increasingly banking on its Indian operations for adding weight to its business as numbers stay uncertain in developed markets due to the recession.
Hyundai, which started operations a decade ago and now enjoys a strong presence in India, said the country is playing a pivotal role in the company's global operations and is expected to contribute more to profits than even from China.
H W Park, the new MD & CEO of Hyundai India, said the Indian subsidiary contributes between 15% and 20% to Hyundai's global turnover. Asked about the profit, he refused to quantify, but said it is expected to be higher than China next year. The Indian subsidiary had been making profits for many years.
Park said unlike China, India has a unique position in Hyundai's operations as factories here not only service the domestic market but also cater to overseas markets in Europe.
"While China only sells domestic, India is used both for domestic and export markets.'' Higher profits, however, could be justified considering that the companies have to operate through a joint venture in China, while in India, solo operations are allowed which mean full repatriation of profits to the parent.
Hyundai, which is currently the second-biggest car maker in India behind Maruti Suzuki, has an annual production capacity of around 6 lakh units, half of which is used to service export markets. The company has earmarked India as one of the hubs for manufacture of compact models like i10, i20 and the Santro and sells the India-made cars to over 100 countries.
While developed markets in Europe and the US remain under pressure, operations in India have been growing. The company's cumulative sales in January-October 2009 period have grown by 12% year-onyear at 4.57 lakh units (4.07 lakh) with domestic sales up 11% at 2.39 lakh units and exports up 13% at 2.17 lakh units.
Hyundai is not the only company to benefit from a strong presence in India.
Suzuki trebled its full-year global net income forecast on the back of strong Indian operations, despite sluggish sales overseas. While home market Japan as well as European countries contracted for Suzuki, India remained the only market to grow, with first half sales here moving up by 24% at 4.7 lakh units against 3.8 lakh units in the corresponding period.
Honda is another company that is reaping benefits of an early entry into India. The company has been gaining due to its strong presence in the two-wheeler market. Its twin two-wheeler joint venture—Hero Honda and fully-owned Honda Motorcycle and Scooter India (HMSI)—are expected to contribute as much as 40% to global motorcycle production and also a sizeable portion of profits and revenues.
Golden Goose
Indian subsidiary contributes between 15% and 20% to Hyundai's global turnover and profit is expected to be higher than China next year
Suzuki trebled full-year global net income forecast on back of strong Indian operations, despite sluggish sales overseas. India remained the only market to grow
Honda's JV Hero Honda and own operations HMSI are expected to contribute 40% of its global production
Maruti now drives Suzuki’s profit
JV Contributes 46% To Japanese Co's Consolidated Profit; Co To Get More Freedom To Take Key Business Decisions
MARUTI Suzuki, for long Suzuki Motor Corp's biggest overseas operation in volume terms, has emerged as the biggest driver of its Japanese parent's profits, earning for itself greater freedom to take key commercial decisions and the promise of more cash to develop cars for the local market.The Indian car maker's share of Suzuki's consolidated profit rose to 46% during the year ended March 2009, up from 30% in the previous year. Maruti's topline is around 13% of the Japanese group's consolidated revenues.
"Maruti is definitely becoming more and more important in the Suzuki stable," the Indian company's MD Shinzo Nakanishi told ET, adding that Maruti's net sales had risen 14% last fiscal year, a period that saw Suzuki's net sales fall 14% to 3.05 trillion yen. Maruti, in which Suzuki owns a 54% stake, ended 2008-09 with sales of nearly 800,000 units, its highest in 25 years, making it a rare bright spot in Suzuki's global operations, at a time when the automobile sector has been hit hard by a severe recession worldwide.
"All major markets, including the US, Europe and most of Asia along with Japan, were down last year. Maruti's performance has been much better than these markets," Mr Nakanishi said. A Maruti spokesman said the company accounted for largest share of profit among Suzuki's global businesses, clarifying, however, that this profit was not repatriated to Japan, but held as reserves and reinvested in expansion projects, new models and new engines.
Maruti's rising clout in Suzuki pie will yield it two benefits in the future, Mr Nakanishi said. It's parent will spend more on local research and development and grant it greater autonomy on export decisions. "Suzuki will definitely spend on R&D for Maruti, but with a focus on India and neighbouring markets," Mr Nakanishi said. Maruti, which makes every second car sold in India, has already started taking a call on exports, independent of its parent's thinking. For instance, while Nissan is sourcing 30,000 units of Maruti's AStar model to be sold as Pixo in European markets, Maruti is less eager to do such contract manufacturing deals.
"We want to do a small number of OEM-led export deals because the firms change offtake plans suddenly depending on demand," Mr Nakanishi said. "So, although Suzuki in Japan is doing a Nissanlike deal with Mazda, we are not interested." Unlike the A-Star or Alto, which it ships for sale overseas, Maruti does not plan to export its new model Ritz, and is yet to take a call on whether it would phase out its oldest model, the M800.
Maruti's capacity to produce one million cars a year means that it has enough headroom to roll out all its brands. "But if demand suddenly becomes so high that we don't have the capacity, we will do a rethink on which brands to phase out from our stable," Mr Nakanishi said.
TOP GEAR
Maruti's topline is around 13% of the Japanese cos' consolidated revenues
Co's rising clout in Suzuki pie means the parent co will spend more on local research and development and grant it greater say in export decisions
Auto Sector India FII Investement Outlook
It is seen that FII are increasing the stake in auto companies and share prices are showing better than expected rise ahead of other sectors.
Co Name
March Low
Price on 15th April
% rise
Bharat Forge
26/03 87
135
55
Amtek
25/03 73
96
32
SS Duncan
25/03 80
130
62
Minda
18/03 80
113
42
Bosch
25/03 2890
3118
8 *
AIA
24/03 112
175
56
Exide
12/03 32
49
53
Apolo Tyre
12/03 16
23
44
Cummins
12/03 149
199
33
MRF
09/03 1511
2325
56
* Due to buyback.
There is marked improvement in auto shares in last one month on the back of improved sales nos except in 2 wheelers where only Hero Honda has performed well. The recovery is auto is seen from the recovery in auto component sector also. Except Bosch and MRF all other stocks have moved up in this period. Though Sensex has recovered 30% from the March low the majority of auto component stocks have recovered by more than 40 to 50% in last one month.
The auto component companies could announce expansion in margins even though there is pressure on the top line. The margin expansion is coming from lower metal and plastic prices. The only pressure auto component is facing is delayed payments by the OEM and non availability of the working capital.
Domestic consumption has shown marked improvement in auto sells due to VI pay commission, inclusive growth agenda, lower interest rates and higher disposable income in rural India which has direct bearing on the auto component segment. Also the entry of foreign car manufactures in India such as BMW, Mercedes, Nissan, Toyato, Hyundai and closure of GM, Chrysler etc will have positive impact of Indian auto ancillary.
After the recovery in large cap companies, small cap companies will give handsome returns from hereon.
Co Name
March Low
Price on 29th April
% return
Book Value
Dic to B V %
Sona Koya
5.35
9.11
70
9
Nil
Motherson
52
76
46
10.08
Nil
Subros
14
19.66
40
29.01
47
ANG
29.60
30.10
1
65.97
119
Fairfield
12
22.35
87
7.45
Nil
Auto Corp Goa
95
159
67
186.37
17
Autolite
14
22
57
25.35
15.22
JMB Auto
16
25.25
58
45.15
78.81
Dagger Forst
7
12
71
89
641
Lumax Ind
60
87
45
144.72
66.34
Munjal Auto
25
46
84
58.40
26.95
Omax
15
22
46
67.78
208
Talbros
15
21
40
57.07
171.76
Triton Valves
456
650
42.56
954.54
46.85
Ucal Fuel
24
33
38
127.44
286
Z F Steering
72
96
33
120.27
25.28
Amar Raja Battery
30.5
53
74
39.67
Nil
Evinix
1.49
2.40
61
6.53
172
Goa Carbon
35
55
58
66
20
Therefore irrespective smart rise, auto component sector has huge potential to give good returns and stocks which are available at maximum discount to book value are
Dagger Forst 641%
Ucal Fuel 286%
Omax Ind 208%
Talbros 172%
Evinix 172%
ANG Auto 119%
Investors who are bullish on auto and auto component sector will do well by picking above 6 stocks for long term where the chances of going wrong are almost nil.
The study is made by Rajkumar Jha
