The Indian auto component industry has been navigating through a period of rapid changes with great lan.

Driven by global competition and the recent shift in focus of global automobile manufacturers, business rules are changing and liberalisation has had sweeping ramifications for the industry. The global auto components industry is estimated at US$1.2 trillion. The Indian auto component sector has been growing at 20% per annum since 2000 and is projected to maintain the high-growth phase of 15-20% till 2015. The Indian auto component industry is one of the few sectors in the economy that has a distinct global competitive advantage in terms of cost and quality. The value in sourcing auto components from India includes low labour cost, raw material availability, technically skilled manpower and quality assurance. An average cost reduction of nearly 25-30% has attracted several global automobile manufacturers to set base since 1991. Indias process-engineering skills, applied to redesigning of production processes, have enabled reduction in manufacturing costs of components. Today, India has become the outsourcing hub for several global automobile manufacturers. Innovation and cost pruning hold the key to meeting the global challenge of rising demand from developed countries and competition from other emerging economies. Several large Indian auto component manufacturers are already gearing to this new reality and are in the process of substantially investing in capacity expansion, establishing partnerships in India and abroad, acquiring companies overseas and setting up greenfield ventures, R&D facilities and design capabilities. Some leading manufacturers of auto components in India include Motor Industries Company of India, Bharat Forge, Sundaram Fasteners, Wheels India, Amtek Auto, Motherson Sumi, Rico Auto and Subros. The Indias Top 500 Companies, published by Dun & Bradstreet in 2006, listed 22 auto component manufacturers as top companies in India with a total turnover of US$ 3 bn. These companies are in the process of making a mark on the global arena, and some have already acquired assets abroad. Industry Structure The total turnover of the Indian auto component industry is estimated at US$9 bn in 2006. The industry has the resources to manufacture the entire range of auto products required for vehicle manufacturing, approximately 20,000 components. The entry of global manufacturers into India during the 1990s enabled induction of new technologies, new products, improved quality and better efficiencies in operations. This in turn effectively acted as a catalyst to the local development of the component industry. The Indian auto component industry is extensive and highly fragmented. Estimates by the Department of Heavy Industries, Government of India, indicate there are over 400 large firms who are part of the organised sector and cater largely to the Original Equipment Manufacturers (OEMs). Another 10,000 firms exist in the unorganised sector that operates in a tier-format. The firms in this segment operate

in low technology products and cater to Tier I and Tier II suppliers and also serve the replacement market Around 4% of the companies operating in the auto component segment cater to 80% of the demand emanating from OEMs. Within the unorganised segment, apart from supplying in the aftermarket, a number of players are also involved in job work and contract manufacturing.

Source: ACMA

The range of products manufactured, with each broad product segment having a different market structure and technology, has negated any possible concentration of the market in a few hands. The market is so large and diverse that a large number of players can be absorbed to accommodate buyer needs. However, there are a select few large companies that have integrated their operations across the value chain. The key to competing in this industry is through specialisation by producttype, and integrating operations across the related area of specialisation. An interesting insight provided by a study conducted by the National Council of Applied Economic Research revealed that the market segments for auto components included OEMs constituting 33%, local components having 25% with the balance 42% comprising of spurious market including re-conditioned parts. A large part of the spurious or grey market companies are in the unorganised sector. The regional base of auto component manufacturers is mostly concentrated in the West, North and South of India.This regional concentration of auto component manufacturers has been dictated by the emergence of automobile manufacturers in these regions. The set up of Tata Motors, Bajaj, Mahindra & Mahindra and TVS in the 1950s and 1960s laid the foundation for auto component manufacturers in the West and South, whilst the entry of Maruti during the 1980s created the base in the North.

Industry Growth Production of auto ancillaries was estimated at US$10 bn in 2005-06 and has been growing at a robust 20% per annum since 2000. Exports of auto components have been strong growing at 24% per annum since 2000. This growth in exports if sustained for another five years will see Indias auto components exports will touch US$ 5 bn by 2011 from the US$ 2 bn at present. Till the 1990s, the auto component industry was solely dependent on the domestic automobile industry to drive the demand for ancillary products. This composition of the market however is undergoing radical changes with global outsourcing gaining momentum. In recent times, exports has emerged as a significant driver of growth, and the demand emanating from global OEMs and Tier I manufacturers has opened new opportunities for the auto component industry in India. At the same time, a bright outlook for the domestic automobile industry also offers significant growth potential, given the fast rising income levels with a rapidly growing middle and high income consumers.

Share of exports in total production has risen from 10% in 1997 to 18% in 2006. The composition of exports in terms of the proportion of OEM and aftermarket has also undergone a sweeping change since the past decade. The ratio of OEM to aftermarket has changed from 35:65 in the 1990s to 75:25 in 2006. While exports have been booming, there has been a sharp rise in imports of auto components as well, especially in the last three years. From an import of US$ 250 mn in FY03, they have gone up to US$750 mn in FY06. This is a healthy trend, indicative of rising domestic demand.

Investments Since 2000, the auto component industry has recorded an investment level of Rs 18 bn and has attracted US$ 530 mn in terms of foreign direct investment. Investments in the sector have been growing at 14% per year. In 2005-06, investments touched US$ 4.4 bn, and are expected to grow significantly in future.

The Investment Commission has set a target of attracting foreign investment worth US$ 5 bn for the next five years to increase Indias share in the global auto components market from the present 0.4% to 3-4%. This is a sizeable target considering the meagre amount of FDI currently coming into the industry. The changing perception of global auto makers is however fast altering this scenario. With less than 1% share in the global market, India has tremendous potential to emerge as a supply base. Several global giants like Ford and Toyota have already set up base in India to source auto components. Outsourcing is fast catching up with domestic OEMs as well, with most Indian OEMs today sourcing nearly 70-80% of their component requirements from vendors. This changing business scenario is leading to an inevitable outcome of consolidation within the industry. The takeover of Kar Mobiles by Rane Engine and of Gero Auto by Uma Precision are few instances. However, such mergers and takeovers will be few and far in between in the auto component industry, unlike the churn out anticipated in other emerging industries the principal factor being the vastness of the market and the range of products that need to be delivered. Rather than domestic consolidation, the general trend at present is for the large auto component manufacturers to establish a global presence. Top auto component manufacturers have already set up base in the global markets, especially in Europe. Overall, there have already been 16 acquisitions, with six made in 2005. The industry is the third highest among the Indian industries after IT and Pharma, in acquiring overseas assets. These acquisitions have largely been in Europe and the USA. This trend has been possible as the auto ancillary industry in these countries have been collapsing, thus making it affordable to acquire these companies. Nevertheless, this will provide a base for Indian companies to access the European and American markets. Indian auto component companies are also setting up bases in other emerging economies, who are potential competitors, for instance, Sundaram Fasteners greenfield facility in Zhejiang and Bharat Forges joint venture with the Chinese automotive major FAW Corporation. Another auto component manufacturer with plans to enter China is PMP Components, which intends to set up a sourcing base to establish itself as a low cost supplier. These trends are indicative of the changing business environment in the country. Top auto component manufacturers are gearing to take big risks. Their cross-border vision has established them as global companies. Though the going-global phenomenon is limited to a handful of companies, the smaller companies are also indirectly gearing to this trend by entering into formal manufacturing contracts and specialisation.

Prospects Looking forward, the industry displays tremendous potential in generating employment and boosting entrepreneurship in the country. The spate of new investment plans announced by global and domestic automobile manufacturers promises the emergence of India as a global hub for auto components. The industry is transforming, and the boost in demand will see the emergence of several new players in the industry. The vast market for auto components, and the diverse products and technology involved ensures a place and role for many. At the same time, the entry of several global automobile manufacturers will bring in more regulation into the industry and see a pruning of the spurious market. Among the smaller players in the unorganised segment, this implies moving away from being standalone companies, to entering into either contract manufacturing or being ancillary units. The newly defined rules are specialisation, development and delivery that hold the key to success in the auto component industry. Foreign Acquisitions by Indian Companies Indian Company Acquired Carl Dan Peddinghaus CDP Aluminiumtechnik Federal Forge Imatra Kilsta AB Scottish Stampings Ltd Germany Germany USA Sweden Scotland Country

Forge

son Sumi

WOCO Group G&S Kunststofftechnik GmBH GWK New Smith Jones Inc Zelter Bleisthal Produktions GmBH Cramlington Forge CDP GmBH Shakespeare Forgings RBI Autoparts SND BHD Fuji Autotech Source: Auto Component Manufacturers Association

Germany Germany UK USA Germany Germany UK Germany UK Malaysia France

Auto

am Fasteners

ge

utolec

oyo

ancillary stocks
January 06, 2005 15:34 IST

In the outsourcing space, the prospects for auto ancillary manufacturers are bright from the longterm perspective. But identifying the right stock from this sector becomes difficult on account of technical complexities involved and higher nature of fragmentation of the industry. In this article, we have made an attempt to simplify this process and help investors identify a good auto ancillary stock. Profile The Indian auto component industry is highly fragmented in nature and has 416 players, employing 250,000 people. The output of the Indian auto component segment, as per ACMA, was estimated at around $5.1 billion (Rs 245 billion) in FY03. 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 following table lists the industry segmentation on the basis of components, their contribution to the overall industry revenues and some of the leading players in those segments.
Sub-groups Engine Parts Transmission & Steering parts Products Pistons, piston rings,fuel injection pumps Transmission gears, axles and wheels % to total products Leading companies

24.0% Ucal Fuel, MICO, Lucas 16.0% Sona Kaya, ZF Steering 12.0% Gabriel, Munjal Showa [ Get Quote ]

Suspension & Braking Leaf springs, shock absorbers parts Electrical Equipment Others Spark [ Images ] plugs, batteries, starter motors Dashboard instruments Fan belts, sheet metal parts

8.0% Exide [ Get Quote ], MICO, 7.0% Motherson Sumi, Lumax 33.0% Rico Auto, Sundram

Since auto ancillary companies mainly act as vendors, it is extremely important for them to remain competitive, both in terms of cost as well as quality.
DON'T MISS! -- How to pick an aluminium stock

As a consequence, the profitability of the company at the operating level assumes great significance. Therefore, we consider operating profits as a good starting point in separating a good auto ancillary company from the rest. Let us throw some light on the various operating parameters presented in the flow chart below: Operating profits: The operating profit of an auto ancillary company is the difference between the revenues earned and the expenses incurred. We shall now focus on the revenue side first.

An auto ancillary company can generate revenues from two major sources, the first is from supplies to OEM (original equipment manufacturers) and the second is through after market sales. With the advent of the best manufacturing practices in the domestic auto industry, auto players have significantly cut the number of auto ancillary manufacturers they source their components from and in line with the global trend, this has led to the tierisation. Naturally, the auto ancillary manufacturer, which directly supplies to the OEMs and offers more value added products, is the one that is known as a Tier I player. Further, the components and subassemblies required by the Tier I players are sourced from Tier II and Tier III suppliers.

Thus, an auto ancillary company can generate its revenues from any one of the above-mentioned three ways. In this sector, Tier I players on account of their direct interface with OEMs have a better bargaining power and consequently enjoy higher margins. On the flip side, these players have to be very particular about their quality and have to keep high levels of inventory, thus increasing working capital needs. Apart from direct supplies, an auto ancillary player can also generate revenues from after market sales, i.e. it can have a presence in the replacement market. Here, the margins are not only higher on account of superior realisations, but it also provides a cushion against slowdown in the auto industry when the demand from OEMs decline. Thus, while selecting an auto ancillary stock, it becomes necessary to delve into the position of the company on the supply value chain and at the same time, check whether the company derives some of its revenues from after market sales. The higher the company on the value chain and larger the percentage of revenues derived from the after market, the better it is. Since companies in the industry are suppliers to the auto industry, the performance of the auto industry has the single largest impact on the fortunes of the auto ancillary industry. Therefore, it becomes imperative for an investor to track the performance of the auto industry (both domestic as well as international), in order to determine the growth prospects of an auto ancillary company. What would happen if an auto ancillary company generates majority of its revenues by supplying to just a single auto company and the latter shuts down? Not surprisingly, even the auto ancillary company might have to shut down or scout for other clients, which would be hard to come by. Therefore, in order to avoid such a scenario, an investor should look for companies that have adequate client diversification, both in the domestic as well as international markets. The larger and stronger the number of clients, the lesser the risk for the auto ancillary company. Apart from client diversification, geographical diversification, where the company derives a good part of its revenues from exports or supplies to overseas players is also an important criterion for identifying a good auto ancillary company. Since auto ancillary companies usually supply to leading automakers, quality issue becomes extremely important. This assumes even more serious dimensions while supplying to foreign auto majors. Even a small defect in quality could lead to heavy penalties. Therefore, if a company has some sort of recognition such as the Deming quality awards or best supplier award from respected auto companies, it always adds to its credibility and ability to win lucrative contracts. Thus, after looking into the major aspects of the revenues side, it becomes clear that companies with more value added products and sufficient client and geographical diversification will prove to be a safer bet than its peers, which do not have the same characteristics.

Having gone through the revenues part of the flow chart, let us now glance through the major expenses that are incurred by an auto ancillary company. Expenses: The auto industry has evolved to a stage where auto companies have substantially increased the number of components they outsource. Apart from design and development work and manufacturing of some key components, almost all the other components are outsourced. In such a scenario, auto ancillary players have been increasingly burdened with higher raw material expenses, notably steel. Since auto ancillary companies have a weaker bargaining power, majority of the input cost rises are absorbed internally (either through cost restructuring or lowering margins). This increases the risk profile of the sector. Here also, Tier I players have been less affected as opposed to Tier II and III players on account of the formers' higher bargaining power. Even for those manufacturers, where steel does not form a major part of input, raw materials prices account for 50%-60% of the total sales (tyres, for instance). So, investors have to monitor prices of steel, rubber and petrochemicals, which are key inputs. Apart from raw material prices, salaries and wages is the other important expense head for an auto ancillary company. These typically tend to be on the higher side (10%-12% of sales) if the operations of the company are more labor intensive, whereas for companies with a high degree of automation, the same stands at 5%-6% of the total sales of the company. For a company, where exports form a significant part of total revenues or where most of the inputs are imported, exchange rate prevailing in the markets also tend to affect the operating margins of an auto ancillary player. Apart from these, asset turnover ratio, return on assets and working capital to sales are other factors that a investors should compare for investment purposes. Thus, having broadly looked at the parameters that determine the profitability of an auto ancillary company, we now have a look at what kind of valuations should an auto ancillary company command. Valuations: The fortunes of auto ancillary companies are linked to the fortunes of the auto industry and as a result the bargaining power stands considerably reduced. Thus, these companies have little leeway in improving their topline performance by raising prices. The onus of improving profitability therefore falls on cost reduction measures and effective deployment of funds. Hence we feel that P/E multiple is an important metric in evaluating the performance of a company from this sector. Companies that cater to domestic market deserve a lower P/E multiple as compared to a company that derives a significant share from export markets.

Auto ancillary scrips shift to top gear

Nesil Staney / Mumbai September 17, 2005

The auto ancillary scrips have been major gainers in the past one month, with the top five gainers registering average returns of about 50 per cent. With Indian players competing with the global peers in the industry, the domestic auto ancillary sector is said to be growing by about 25 per cent per annum. Vikram Kotak, President, Techno shares and stocks, said: The industry has witnessed excellent growth in the past and is poised for larger growth. The valuations are quite comfortable and with the growing global expansion and domestic demand, it is rated as one of the best sectors. Bharat Forge is one of the largest auto ancillary companies in the world, catering to the auto majors in Europe. The scrip gained significantly powered by its aggressive aquisitions of many companies in the US as well as Europe. According to a industrial rating research by Crisil, the auto ancillary industry is estimated to have grown above 20 per cent in the past. The growth was led by the strong domestic growth posted by almost all the segments of the automobile industry and high growth in exports. The growth in passenger cars and utility vehicles augmented the growth of the allied industry in the domestic market while heavy growth story in the export front gave a tremendous boost to the sector in terms of growth. The exports have seen to have grown by 25-30 per cent in the past many years. Increased outsourcing of components from India by global Auto majors have also helped the industry, said an analyst with a domestic brocking firm. The scrips that gained the most in the past one month were Jagan Lamps which gained over 82 per cent, ANG Exports (55 per cent), Atul Auto (51 per cent), Remsons Industries (46 per cent), Gajra Bevel Gears (45.74). The major players in the sector have also gained significantly in this period. Bharat Gears gained over 25 per cent, Amtek India (38 per cent), Motherson Sumi Systems (11 per cent), Precol (7 per cent), Exide Industries (11 per cent), Sundaram Clayton (8.61 per cent) and Bharat Forge (8 per cent). The sector has also posted huge appriciation in the last one year period. The major gainer was ANG Exports, which posted an appreciation of over 4650 per cent from Rs 2.2 to Rs 100. The company was recently in news after its subsidiary tied up with a Chinese auto components maker to manufacture automobile parts for the domestic as well as overseas markets. Other major gainers in the last one year were Rishi Laser Cutting up 1516 from Rs 10.10 to Rs 163.30, Talbros Automotive Components up 842 per cent from Rs 15.02 to Rs 141.69 and Triton valves up 588 per cent from Rs 281 to Rs 1935.30.

Auto ancillary scrips shift to top gear

The Indian Auto Ancillary industry is one of the sunrise industries in India with higher growth prospects. This industry is a crucial segment of the economy in a country as it bridges many services and industries. The auto ancillary industry in the country has the potential to develop as one of the major players in the world and this industry of the country holds the pride of being the fourth largest commercial vehicle market in the world, second largest two-wheeler market in the world, largest three-wheeler market in the world and largest two-wheeler manufacturer in the world. Right from its beginning in 1940s, the auto ancillary industry in India has come a long way and when tracing the development of this sector in India, it can be divided into three different groups namely period prior to the entry of Maruti Udhyog Limited and period after the entry of Maruti Udhyog Limited and period after liberalization. The names of some of the top players in India in the Auto Ancillary industry are given below: Top six companies in the Auto Ancillary industry in India: Amtek India Aditya Gears Limited Brakes India Limited Dynamatic Technologies Limited: Goodyear India Limited

 Tube Investments of India Limited Some of the details regarding these top players in the Auto Ancillary sector in India are given below: Amtek India: Amtek India is a diversified component supplier in the global supply chain and auto ancillary manufacturing industry. This forward looking company is engaged in the manufacture of components, modules, assemblies and automotive systems in the auto ancillary sector. Over the past several years of its existence the company has lived upto its commitment to fulfill the increasing indigenous demand in the auto ancillary industry and thus they have now shown their indigenous presence in the industry. Aditya Gears Limited: Aditya Gears Limited is operating from the city of Kolkata and they are focusing on products like motors, transmission device and components, drive shafts and construction products in the auto ancillary industry. Brakes India Limited: Brakes India Limited came into existence in the year 1962 and they are paying particular focus on the quality of products, processes and services by setting the global standards as their benchmark. They are operating from the city of Chennai in Tamil Nadu and they are using information technology commensurate with business requirement facilities for business processes, marketing, manufacturing, development and product design of auto ancillary components. Dynamatic Technologies Limited: Dynamatic Technologies Limited are operating from their corporate office at the city of Bangalore in India with automotive factory in the district of Kanchipuram in Tamil Nadu. In addition to auto ancillary products, they are also engaged in other industries like powermetric, metallurgy, hydraulics and aerospace industry. In the automotive sector, they are engaged in the production of high quality ferrous and non-ferrous transmission components and critical engine. They have some of the top companies in India and abroad as their customers. Goodyear India Limited: Goodyear India Limited is operating from the city of New Delhi in India with centres in Maharashtra and Haryana. They are operating in the industrial field for more than 100 years and they are able to stay ahead of the competition due to their committed efforts. They are engaged in manufacture of tyres in the auto ancillary sector in India. Tube Investments of India Limited: Tube Investments of India Limited came into existence in the year 1900, they are operating from the city of Chennai in Tami Nadu, and they are engaged in different sectors like technology, metal formed products, engineering, cycles and components. Their popular subsidiaries are TI Metal forming, TIDC India, Tube products of India, TI Cycles of India and BSA motors. Thus, these auto ancillary companies play a great role in the development of automotive industry in India.