Auto components industry future looks uncertain: ICRA

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Auto components industry future looks uncertain: ICRA

ICRA has come out with its report on Indian Auto Components Industry. According to the research firm industry future is looking uncertain.

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Bharat Forge BSE | NSE 29/05/12 Are Mutual Funds betting on Bharat Forge? Other Stocks in this news Bosch | Exide Industries |

ICRA has come out with its report on Indian Auto Components Industry. According to the research firm industry future is looking uncertain.

Macro-economic concerns in the domestic market and base effect impede revenue growth in Q2 FY12

The Indian auto components industry witnessed a moderation in revenue growth in Q2, FY12 (based on our sample of 36 select listed entities), with growth being flat on QoQ basis; although revenue growth continued to be in double digits on YoY basis. Within our sample universe, however, there was a wide variance in the performance of individual companies with revenue growth being relatively higher for companies dependent on the domestic two-wheeler (2W) and Light Commercial Vehicle (LCV) segments; and growth being lower/ negative for companies dependent on the Medium & Heavy Commercial Vehicle (M&HCV) and Passenger vehicle (PV) segments. This broadly mirrors the trend in sales volumes seen in the respective automobile segments in Q2, FY12. Further, despite macro-economic challenges currently being faced by the automotive industry - PV and M&HCV segments in particular - due to inflation, hardening interest rates and rising fuel prices, many of the auto component manufacturers continued to reported strong double digit revenue growth in Q2 FY12 supported by (i) component exports to Europe for CV applications and (ii) rising share of revenues from the non-automotive segment. Also, several entities in our sample have been displaying significantly higher revenue growth than average over the last several quarters by virtue of their success in improving market share, expanding product portfolio and changing product mix in favour of higher realization components. The above initiatives sailed such companies through in Q2 FY12, like they did in earlier quarters, allowing them to report healthy topline growth, overall demand side pressures notwithstanding.

This peculiarity is not unusual in the Indian context as a relatively small set of OEMs enjoy a significantly high market share in each of the automotive segments; plus, most Indian ancillaries lack adequate scale to enjoy the full benefits of geographical or product diversity as compared to their global counterparts. Thus, while the revenue growth of auto component manufacturers dependent entirely on the 2W segment remained healthy in H1 FY12 due to continued resilience shown by this segment, the performance of companies dependent on the PV segment was in stark contrast as volumes suffered due to both demand side as well as supply side concerns2. Notwithstanding the above, adequacy of diversification - in terms of customer base, segment mix, product portfolio and geographical footprint - remains a desirable metric as it enhances a company's ability to overcome cash flow variability across business cycles and makes it better equipped to endure cyclical shocks. In our sample too, entities which score high on the diversification parameter, have been able to demonstrate steady revenue growth in H1 FY12 and in prior periods.

BHARAT FORGE

Bharat Forge Limited (BFL) registered 26.6% growth in operating income to Rs 909 crore driven mainly by strong export growth of 57.6% on YoY basis. While domestic market still constitute majority of revenue share (52.6%), the share of European market in overall revenue pie has increased considerably over last one year.

European and North American CV market continued the strong growth momentum witnessed in previous quarter due to strong recovery in respective automotive market. BFL as a group supplies to all major OEMs in Europe and the share in order-book has been increasing over past few years. The European CV industry has witnessed strong recovery in current fiscal though overall volumes are still ~40% below the peak of CY2007. The European demand in primarily driven by revival in German and French market and early signs of resurgence in UK market.

The North American market is witnessing strong replacement cycle with introduction of more fuel efficient models and replacement of old fleets. North American Class 8 truck volume continued their growth momentum and has registered 24.7% growth on YoY basis during Q2 FY12. BFL's exports to US are likely to grow at healthy pace in near to medium term largely driven by strong replacement demand and low base effect in the underlying automotive market.

Non-Auto business now contributes ~40% of standalone revenue and the segment continues to grow with strong traction across sectors. Non auto revenue in the quarter grew by 24.1% to Rs 329 crore, facilitated by increasing contribution from new Baramati facility which has grown by 86% on YoY basis to Rs 181 crore.

BOSCH

Bosch Limited (Bosch) reported a healthy 16% growth during the third quarter of CY-2012 aided by strong performance of diesel, aftermarket sales and power tools segments. However, on a sequential basis, BL's revenues during Q3-2012 declined by ~3%.

Revenue growth was also supported by export segment, which grew by 11% on y-o-y basis. Key business segments, diesel and after market, reported a healthy 13% y-o-y growth each; while the starter and generator segment grew by ~73%. Segments under non auto division involving power tools, security systems and packaging grew by 17%, 19% and 50% respectively during the quarter. However, gasoline systems segment reported de-growth of ~30% owing to strike at Maruti. With the resumption of operations at Maruti, the segment is likely to report positive growth, going forward

Margin performance - Aided by strong positioning of products in the market and supported by benefits of scale economics which results in better bargaining power, Bosch's margins are generally higher. While spike in input costs and high employee expenses affected the operating margin in the recent quarter, the margin erosion is seen minimal given the challenging operating environment and demand pressure. Net profit of Rs. 288.1 crore also includes non-operating income of Rs. 39.4 crore realized from sale of marketable securities and interest income.

Capex plans: To match the growing demand in the user industries, Bosch is investing in capacities. Planned in a phased manner, the company's cumulative capex spend for the next three years is Rs. 2,500 crore, which also includes investments in research activities.

EXIDE INDUSTRIES

Revenue Growth - In Q2, 2011-12, Exide Industries Limited (EIL) reported revenues of Rs. 1,176.1 Crore on a standalone basis, a growth of 4.3% (YoY) and a decline of 5.5% QoQ. Notwithstanding a well-diversified product and revenue mix, EIL's YoY revenue growth in Q2 FY12 remained in low single digits due to (a) lower off-take by OEM customers, (b) lower replacement demand, an outcome of the slowdown that had hit the domestic PV industry in 2008/ 2009, and (c) lack of growth in the industrial battery segment which caters to the telecom, power generation and construction segments. EIL's revenue slowdown in Q2 FY12 in fact could have been sharper but for the 30% volume growth recorded by the company's two-wheeler battery segment.

The above concerns are unlikely to abate over the short term and hence the company's revenue growth may remain muted over the next couple of quarters. However, a strong surge in replacement demand for PV batteries could be expected soon thereafter since the volume slowdown of 2008/2009 was relatively short lived. The factors in favour of EIL which are expected to enable it to return to a healthy growth trajectory include its ongoing capacity expansion, its focus on further expanding distribution network and its strong brand strength in the replacement market. However, EIL faces strong challenge from intensifying competition in both OEM as well as replacement market - which is reflected in loss in market share in the OEM segment following the award of business by certain OEMs to other players in view of capacity constraints faced by EIL in the past; price cuts undertaken by EIL in August 2011 suggesting erosion in pricing power in the replacement market. While some market share loss to organized players may be inevitable, EIL's ability to offset this loss by taking market share away from the unorganized segment may be critical from the standpoint of revenue growth and capacity utilization.

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To read the full report click on the attachment