Auto sector sees decline in deal activity; outlook bullish

Merger and acquisitions in the auto industry has declined in the last four years, but improved market sentiments may result in strong deal activity for the sector in the near future, a report says.

According to Grant Thornton's Automotive Sector Dealtracker, the number of deals in the Indian automotive sector has witnessed a decline from 51 deals in 2011 to just 22 transactions in 2014.

Moreover, the private equity (PE) deals in the automotive sector dipped from 14 deals in 2011 to just four deals in 2014.

However, the average PE deal value for disclosed deals is up from USD 18 million in 2011 to USD 23 million in 2014.

As per the report, the policy impetus shown by the current government has rejuvenated the market sentiment, which is expected to result in strong deal activity for the sector in the near future.

Besides, attractive valuations and a change in the attitude of Indian promoters to dilute their stake for capital raising and growth, is expected to drive PE and M&A deals going forward.

The growing middle class, higher consumer spending, labour arbitrage opportunities and rising demand for light vehicles in India have increased the attractiveness for automotive companies historically.

"Most Original Equipment Manufacturers (OEMs) are looking at India on a positive note and their plans to invest have been well articulated. With growing optimism, companies are expected to look at ways for growth and M&A and PE activism in this sector can only look up from now on," Grant Thornton India Partner Sridhar V said.

According to the report, major risk factors affecting the growth of automotive industry include market risks such as fluctuations in foreign currency, increase in interest rates, high inflation, higher raw material and other input costs and regulatory risks such as increase in excise duty rates, political uncertainty, and complete decontrol of fuel pricing.