The year 2014 will bring good news as well as new challenges to the Indian auto components industry.
In the financial quarter ending 31 December, 2013, the Indian auto industry declined further. Passenger vehicle sales have been declining for some time; commercial vehicle sales are the most affected. It is only the two-wheeler sales that managed to buck the trend of declining sales. Later this month, the Auto Expo shows - Motor and Components, would be held at Delhi, perhaps re-igniting growth into the Indian auto industry, an expectation of the various elements in the Indian auto industry. This expectation of re-igniting growth is going to be a tough thing. Tough since the industry is continuing to witness weakness in demand across the board.
According to industry analysts Jitin Makkar and Shamsher Dewan of ICRA, even those automotive components suppliers that were diversified are witnessing a decline in their stability. Some have clearly fallen on bad times. The Indian Auto Component Industry's revenue growth in the 2012-13 was the slowest in the last five years on the back of weak demand from domestic OEMs, sluggish export volume growth starting Q2 FY 2013 and tepid replacement market sales. Suppliers of parts to the M&HCV segment and the passenger car segment were the most severely impacted, and the situation is unlikely to improve until the later half of 2014. Exports to USA also declined significantly during the second half of 2013 due to a sharp fall in demand. This is expected to continue in the New Year as well.
With the results of many companies during the last quarter remaining largely in the negative zone, revenue growth of only a few suppliers in 2014 is likely to be higher than the industry average on the back of market share gains, feasible change in model mix, rise in content per vehicle besides revenue accretion due to corporate actions such as acquisition and amalgamations. Considering the situation where an estimated 45 per cent auto component suppliers recorded a positive growth in 2013, for the year 2014, the forecast reads continuing dullness, if not decline to under 40 per cent in line with further decline in sales of automobiles in India.
According to the Automobile Sector Outlook 2014 by Dun & Bradstreet India, domestic automobile sales are likely to witness moderate growth whereas exports will continue without sheen. The reflection of this on the Indian auto components industry will include tepid volume growth with some help from a better performance in the replacement market for those auto components suppliers that have a presence there. EBITDA margins in 2014 will continue to be under pressure due to fluctuating input costs.
Most automakers in India have increased the prices of their vehicles in a region of 2-2.5 per cent, indicating that they are no longer capable of absorbing the rise in input costs. Indian Rupee will witness fluctuation, and further decline in 2014, affecting the input costs of automakers as well as the automotive suppliers. The adverse impact of Rupee depreciation against the US-dollar will result in an increase in raw material costs for auto component manufacturers. This will result in a possible sequential dip in EBITDA margins. Medium and heavy commercial vehicle will lag growth in 2014, exposing those auto components manufacturers to weakness that has higher dependence on this segment. LCVs will perform better, and are therefore expected to shield suppliers that serve LCV as well as M&HCV segments to an extent. Demand for commercial vehicles is likely to be weak throughout 2014. With rising diesel prices, buyers of passenger vehicles are slowly turning back to petrol versions. Further rise in diesel prices in 2014 will increase pressure on automotive component manufacturers that invested in diesel engine technology. Automakers with flexible manufacturing lines will find it easier to address the market swing towards petrol.
The overall passenger vehicle scenario in 2014 is expected to remain lackluster, with decline in revenues on YOY basis for various entities supplying to the passenger vehicle segment in 2014. Some growth may be witnessed in the passenger vehicle segment in the second half of 2014. However, it will be weighed down by impact of
Rupee depreciation on input costs and increase in selling expenses led by weak demand growth.
A section of auto components manufacturers that witnessed relatively steady growth in the revenues in the recent period were those with diversified interests. These companies have diversified revenue streams leading to improvement in average realizations, and supplies to relatively faster growing models.
Supply to faster growing models allowed finite suppliers to maintain a steady revenue growth in contrast to the
sharp fall in revenues experienced by several others.
This trend will continue in 2014. Company-specific positive factors will continue to play a role in allowing select entities to maintain a positive on the lower revenue growth front despite industry wide weakness in demand. Some spares manufacturing companies will continue to benefit from higher exports and traction in sales to the replacement market.
Increased thrust in the replacement market will derive benefits for some auto component manufacturers in 2014, from superior average realization from price increase as well as from higher market penetration. Besides issues related to fuel option mentioned above, compressing various other internal costs to the extent possible will continue in 2014, allowing auto components manufacturers to ensure good margins.
Those catering to the replacement market will be able to ensure good margins because of the independence they enjoy. Throughout 2014, auto component manufacturers will continue to hire skilled manpower to derive greater productivity, reduce tool consumption and improve yields. If a weaker Rupee helped automotive components manufacturers to push exports in slowing markets, issues like availability of quality power will continue to weigh on the EBITA margins; especially in case of those manufacturers that have higher reliance of power. Castings manufacturers for example.
Auto component exports from India were worth Rs 53,000 crore in 2012-13 representing 24 per cent of the industry's total turnover. Component exports have grown at a strong CAGR of 40 per cent during the last three years led by
traction in supplies to Europe and America. Particularly striking about this growth is the anemic global automotive demand as well as the growing sophistication of automobiles.
In the later half of 2013, some markets in Europe starting showing signs of growth. This is likely to continue in 2014, the trend getting stronger in the later part of 2014, a good signal for auto components suppliers that are exporting to Europe.
Given the diversity of components that are exported, and in view of the demand for proprietary parts as well as general parts, from a medium term perspective, auto components exports from India will continue to grow at a healthy pace due to Indian suppliers growing focus to expand overseas, not excluding the compelling cost factor supported by the depreciation of Rupee. Depreciation of Rupee turned India into a favourable destination for sourcing auto components over China. This trend is expected to continue as global automotive manufacturers find lucrative to source from India.
This is especially true for labour intensive product lines such as manufacturer of wiring harnesses; select post engine parts including gearshift forks, rocker arm walls, etc. The cost advantage to Indian entities producing such parts is estimated to be even higher in case the Rupee remains at the levels
below 61 for one US dollar. Over the near term, automotive suppliers' base revenue growth is likely to remain weak in the absence of immediate demand triggers for end user across domestic automotive segments. An uncertain global economic environment is also expected to exert pressure on export volumes.
However, factors over the medium term, such as growing thrust of OEMs towards localization, efforts of suppliers to expand business in new geographies, strong upside potential to replacement market demand and increasing sophistication of vehicles shoring up part prices should allow the Indian suppliers to grow at a relatively faster pace than the auto OEM segment. Talking about profitability, auto ancillaries are facing challenges from all fronts. Sluggish demand, pricing manufacturing expenses, unfavourable currency are offsetting the benefits of lower international commodity prices as well as increasing interest costs and repayment related to foreign currency loans. Earnings growth may significantly trail revenue growth in 2014 therefore. Greenfield facilities in Gujarat and a few other parts of India by OEMs with the help of their suppliers will have OEMs as well as suppliers investing; suppliers in vendor parks as OEMs stress on higher localisation, higher efficiency of operations, and a thrust on exports. Investments by suppliers in such facilities may total Rs 7000 crore in the next three years.
Consolidation over expansion will reflect from the auto sector as a whole in 2014. Any move towards capex will be on absolute necessity. Better yet, it will be slow, and would not lead to reflect any major incremental term debt on the balance sheet of automotive suppliers over the near term. A source of worry will be the large debt funded capital expenditure executed by suppliers during the boom period of 2009-10 and 2010-11. Repayment obligations of the term loans availed then will be due now. Absence of sufficient cash flow generation, and lack of visibility are likely
to subject Indian automotive suppliers to refinancing risks.