|You are here: Rediff Home » India » Business » Special » Features|
The muted performance of auto component companies and the dip in their valuations in the last 12-18 months does not come as a surprise, given the sluggish vehicle sales being reported by most auto companies.
Interestingly, such a scenario offers a good opportunity for investors to pick up sound companies that are expected to post robust growth rates over the next two years.
The launch of the Tata Nano and the flurry of investments announced by Indian and global auto majors over the last one year, promises to unleash a revolution, push down prices and dramatically increase the number of vehicles on the road.
The number of cars sold by all the automakers in FY 2007 was 13 lakh and this is estimated to double by FY 2010, largely on the back of the small car sales led by Tata Motors' [Get Quote] Nano.
The thrust on exports, both by domestic and foreign players including Maruti [Get Quote] Suzuki, Tata Motors, Hyundai Motors, which could help put India on the global auto map, is yet another indication of things to come. That apart, global auto makers, too are looking at India for sourcing components for their international markets-thanks to availability of skilled and relatively cheaper manpower.
For instance, General Motors has announced plans to source components worth $1 billion by 2010 while BMW is setting up a international purchasing office in India.
The key beneficiaries of this surge along with the auto companies will be auto ancillary units. The auto parts industry, which is estimated at $17 bn currently, is likely to grow at an annual growth rate of 15 per cent and hit $22 billion by FY2010.
Till now, high volume growth had eluded the sector due to a slowdown in commercial vehicle sales.
But, demand is likely to pick up, helped by the softening or stability in interest rates from Q2CY09, and the expected surge in sales from the passenger vehicle segment. While this growth in volumes is likely to shore up the topline of auto ancillary companies, in the short term, it is unlikely to translate into significantly higher bottomlines for all ancillary companies.
Auto companies, which source components from various suppliers, are under pressure to reduce costs and renegotiate rates periodically. The same is putting pressure on margins of component manufacturers, which are feeling the heat on the raw material front, with prices of steel moving up sharply.
Rupee appreciation has further compounded the problem, for those that derive a big chunk of revenues from exports.
In this context, there are only a few that stand to gain. This select group of
Auto component companies have adopted measures that will help them overcome these hurdles and reap the auto harvest in India and beyond.
These companies (Bharat Forge [Get Quote], Apollo Tyres [Get Quote], Bosch Ltd, Sona Koyo and Amtek Auto [Get Quote]) will be able to withstand pressures and overcome attendant risks with a combination of a manufacturing presence and joint ventures in different geographies, larger product basket, diverse customer base, investments in expansions, strong balance-sheet and healthy return ratios.
Going beyond the US
While India will continue to be an outsourcing destination for forgings and
castings, due to environment and health concerns in the West and also on account of lower costs, the rupee appreciation against the dollar is negating higher export realisations. To overcome this, companies have declined orders from the US (Sona Koyo) and shifted their export focus to Europe. Sourcing raw materials in dollars and selling to non-American customers has given auto component companies a natural hedge against appreciation.
Multiple production centres or the dual shore manufacturing is helping companies such as Bharat Forge to use overseas units for product design, development and manufacture of high value components, while using Indian facilities for high volume production at lower costs.
Companies are able to optimise costs, diversify their product base and add new clients with this strategy.
With a triple whammy from raw material increase, rupee appreciation and slowdown in auto sales, only companies, which have balance sheet strength, invest regularly in expanding capacities and have a diverse client base, will be able to withstand tough times.
With international customers opting for players with scale and Indian vehicle manufacturers looking at risk sharing, value addition and vendor rationalisation, players that are enhancing capacity and moving up the value chain will be able to stick on for the long haul.
While we have chosen five companies, which we think will be able to weather out short-term hiccups, there were other contenders such as Rico Auto and Motherson Sumi. These companies have the size, but have not been included in our analysis due to excessive dependence on a single client or product category. Hence, only those with a higher risk appetite may look at such companies to invest.
Derisked growth: Bharat Forge
Bharat Forge is one of the largest auto forgings players in the world with revenues of Rs 4,500 crore (Rs 45 billion). The company's diversification into the non-auto space should help balance out the risk of any slowdown in the automotive business.
It has extended this derisking strategy to the manufacturing side as well, running nine production centres in six countries with acquisitions in Europe, the US and China.
What stands out for Bharat Forge, according to analysts, is the benefit of scale, brand name, foray into the Chinese market and its presence across various product segments in the auto ancillary space itself.
In terms of scale, the company has a combined capacity of 7 lakh tonnes per annum (tpa) manufacturing over 500 different components. The company has invested Rs 350 crore (Rs 3.5 billion) so far, to cater to the high margin non-automotive segments where some of the components are currently imported.
Next fiscal (FY09), it plans to make components for the capital goods segment and has entered into a joint venture with NTPC to make castings and forgings for power plants.
The company expects non-automotive space to contribute 40 per cent of its revenues in FY11 from 17 per cent in FY07. Bharat Forge's net sales and operating profits at Rs 536 crore (Rs 5.36 billion) and Rs 136 crore (Rs 1.36 billion) for the December quarter were down nearly 200 basis points each, y-o-y.
To overcome the slowdown in the US auto segment, the company is looking at other geographies such as Europe and China and is diversifying its presence in various product segments, to reap the benefits over the long-term. At Rs 283, the stock is trading at 16 times its estimated FY09 EPS of Rs 17 and, should fetch 20-25 per cent returns by end of FY09.
Inorganic path: Amtek Auto
Amtek Auto is the only auto components company in the country to have a sizeable presence in the forgings, castings as well as machining segments. The company is perhaps the most aggressive auto ancillary player in terms of acquisitions, pocketing seven companies in the last five years. In this process, it has not only increased scale, but, also expanded its customer and product base.
The acquisition of two aluminium foundries, including UK-based JL French (JLF), is positive for the company, as the aluminium casting business fetches higher margins.
The company is setting up a plant in Ranjangaon, Maharashtra, which will be scaled up to 40,000 tpa from 20,000 tpa initially, after JLF's 18 production lines are relocated to India.
With auto makers planning to switch from iron to aluminium for engine and transmission parts, because aluminium is lighter and more fuel-efficient, will boost its sales.
For the December quarter, the company's consolidated revenues grew 21 per cent y-o-y to Rs 1,170 crore (Rs 11.70 billion), while earnings grew 10 per cent to Rs 110 crore (Rs 1.1 billion). EBIDTA margins declined 60bps y-o-y to 18 per cent, largely due to increase in raw material and staff costs.
Going forward, margins should remain stable, if not improve, given the addition of aluminium components and relocation of JLF facilities to India.
At Rs 331, the stock is trading at 9.4 times its FY09 estimated EPS of Rs 35 and would give about 15 per cent return in the next 12 months.
Sona Koyo: Small car push
Sona Koyo is the largest steering systems maker in India with a 45 per cent
marketshare. In December quarter, the company increased the capacity of CEPS, its best selling product, contributing 31 per cent to revenues, from 1.75 lakh units to 3 lakh units annually.
The company is working on a plan to increase the indigensation of CEPS to 70 per cent by FY11 from 5 per cent now, thereby improving its operating margins. The operating margins on CEPS is the lowest compared to all its products, at 4 per cent, while its non-CEPS products fetch around 13 per cent.
In terms of new business, in FY09, the management believes that the company will add Rs 20 crore (Rs 200 million) by way of contracts from Tata Nano, which is planned for launch in September 2008. Sona Koyo's new plant at Singur, West Bengal, with an initial capacity of 3 lakh units, is likely to commence production of steering columns and gears for the Nano in the second half of FY09.
The company has entered into a 30:70 JV with AAM Holdings of US to supply axle beams for the micro bus segment and light vehicles (0.75-1 tonnes), such as the Tata Ace, and is likely to start production from its Uttaranchal plant by Q2FY10.
With production for Nano, Ace and other small cars and light vehicles likely to reach full capacity by FY10, the company should gain from this growth.
The company is focussed on the European market planning to increase exports to Rs 85 crore (rs 850 million) by FY09 from an estimated Rs 65 crore (Rs 650 million) in FY08, driven by its joint venture with Fuji Autotech Europe.
For the quarter ended December, sales were up by 15 per cent to Rs 172 crore (Rs 1.72 billion), while operating profits were up by 33.5 per cent to Rs 18 crore (Rs 180 million). The higher profit growth was aided by higher local content in CEPS.
At Rs 54, the stock is available at 9 times its estimated FY09 earnings of Rs 6 and, has an upside of 20 per cent by the end of FY09.
Diesel power: Bosch Ltd
Bosch Ltd, earlier known as MICO, makes common rail injectors and components and diesel fuel injection equipment, industrial and consumer good products such as hydraulics and Blaupunkt car audio systems. While it has a range of products for diverse applications, the automotive segment accounts for over 90 per cent of its topline.
Bosch Group, its German parent, had announced in December 2007, that it intends to invest Rs 850 crore (Rs 8.5 billion) by 2010 in ramping up and adding new facilities. The popularity of diesel vehicles means that Bosch, which is the only supplier of common rail direct injection (crdi) systems (a crucial part of the engine), in the country, will have pricing power, unlike many other auto component players.
The company is planning to hike the production of common rail units (used in diesel engines) to 2 million units by 2013 from 100,000 units now.
Currently, the company supplies common rail systems to Suzuki's Swift and the Tata Ace. Despite a slowdown in the commercial vehicles and tractors space, it is the demand for these engines from car makers that has helped the company increase sales by 3.4 per cent to Rs 1,031 crore (Rs 10.31 billion) in the September quarter.
As with other auto component players, rising staff and raw materials costs dented operating profit, which was almost flat at Rs 220 crore (Rs 2.2 billion). Despite muted growth for CY07, the company being the market leader in fuel injection systems is able to maintain operating profit margins of 21 per cent.
At Rs 3910, the stock is trading at 20 times its estimated CY08 EPS of Rs 196. The stock has fallen by a third since its December 4 peak of Rs 5,880 and should fetch about 20 per cent returns to investors over a one year period.
What also provides comfort is the German parent's intention of having a higher stake in the company. The parent has increased the same from 60.55 per cent to 69.73 per cent in the last six months, through an open offer at Rs 4,600 per share.
Radial ride: Apollo Tyres
India's second largest tyre maker has a leadership position in heavy and light
commercial vehicles. Even though the company gets a large chunk of its revenues from the commercial vehicles segment, it has not been impacted as severely as some of the other auto component players have been on account of slowdown in commercial vehicles sales.
This is because 65 per cent of its product sales is accounted for by the replacement segment where realisations, shorn of arm twisting by OEMs, are better. The company is now focussing on radials and is setting up a plant at Chennai with a capacity of 75 tonnes per day at a cost of Rs 220 crore (Rs 2.2 billion) and is expected to be completed by June 2009.
To cater to European demand for radials, the company is setting up a facility in Hungary with a capacity of 7 million tyres a year, at a cost of Rs 1,146 crore (Rs 11.46 billion) and to be operational by June 2009. The European project, to be funded by internal accruals, will generate revenues of Rs 2,000 crore (Rs 20 billion) per annum.
In addition to this, the company is also setting up an Rs 100 crore (Rs 1 billion) off-the-road (used in construction equipment vehicles) tyre facility in Gujarat in a joint venture with BEML; the latter will buy the entire production from the plant.
For the December quarter, the company reported a 14.3 per cent increase in consolidated turnover (including that of Dunlop, South Africa) driven by growth in volumes from the replacement market, while net profit jumped 166 per cent on the back of productivity enhancements, exports and improvement in the performance of Dunlop, South Africa.
If the company is able to maintain a better product mix on the back of higher margin products like radials and OTRs and enhance operational efficiencies, it will be able to maintain or improve its margins going ahead.
At Rs 47, the stock is available at 7.8 times its estimated FY09 EPS of Rs 6.1 and should be able to generate a return of 50 per cent over the next one year.
|Email this Article Print this Article|
|© 2008 Rediff.com India Limited. All Rights Reserved. Disclaimer | Feedback|