Slowdown woes: Private equity investments, exits in auto parts space dry up

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Highlights:
- Lack of deals in the sector adds to the woes of an existing credit crunch in the market
- In July, passenger vehicle sales fell 31 percent, making it the worst month in two decades, according to Siam data
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The slowdown in India’s automotive industry and concerns over a switch to electric mobility, have dried up private equity investments and exits in the auto ancillary units as well, adding to the credit crunch in the market.

Domestic sales of passenger vehicles have fallen for nine straight months. In July, passenger vehicle sales fell about 31 percent, making it the worst month in nearly two decades, according to data from the Society of Indian Automobile Manufacturers (SIAM). Sale of commercial vehicles, too, fell about 26 percent during the month.

So far this year, the auto components sector has witnessed just two deals worth $29 million, compared with eight deals worth $712 million in 2018, according to deal tracker Venture Intelligence.

“Unpredictable future growth of auto parts’ suppliers due to the ongoing slowdown in the sector both in India and globally is keeping most private equity firms away from the segment,” said Aalok Shah, MD, Rothschild and Co, an investment banking firm. “Also, there is a risk of how forging and casting firms, which presently supply components to internal combustion engines, would make the switch to high-end parts and technology for electric and autonomous vehicles.”

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Traditional auto parts makers, who form a big chunk of the segment, are unlikely to attract investors unless they start making non-engine related parts, such as plastics, interiors, lights and wiring harnesses. They must also invest in future technologies for electric vehicles and autonomous vehicles, which are relevant to PE firms as they have a 5-10 year investment horizon, Shah added.

A section of industry experts, however, said that though the vehicle component makers are looking to switch over to manufacturing electric vehicle parts, the credit crunch could dampen those plans. “The liquidity crunch is choking up marginal and sub-scale firms in the auto component sector, who did not strengthen their balance sheet or could not attract investments last year when the sector was consolidating in a big way,” said Mahesh Singhi, founder and managing director, Singhi Advisors.

Market volatility has also made exits difficult for PE firms. So far this year, Nifty Auto fell about 24 percent to 7,207 level, compared with a 1.8 percent rise in Nifty index at 11,057 points.

Three PE-backed auto components firms, which had filed for an initial public offering last year, have not hit the market due to lower valuation. The companies include The Rohatyn Group-backed Sansera Engineering, Craftsman Automation, which had received funding from Standard Chartered PE, and PineBridge Capital Partners-backed Uniparts India.

“While promoters are expecting an enterprise value of 10-12 times EBITDA, global players are offering single-digit multiples. So, exits are difficult as valuation expectations are not being met,” Shah added.

“We will continue to see control deals with businesses that are not dependent on traditional combustion engines. We also see growth investments going into the various aspects of EV market and investors rummaging through the pile to identify winners in a space where technology is proving to be a great disruptor,” said Preet Singh, Managing Director, Lincoln International, a US-based financial advisory firm.