Exports, overseas operations help auto-component makers stand out

In a year that saw most vehicle makers in India skid in terms of profitability, margins and return on capital employed, auto component makers raced ahead by targeting foreign markets, according to an analysis of key financial ratios of 117 publicly-listed auto-component companies (with a turnover of over Rs.100 crore) and eight vehicle manufacturers.

While high discounts and low volumes singed earnings at auto firms, low commodity prices coupled with revenue from overseas operations and exports helped auto ancillary firms buck the trend in an otherwise dull domestic auto market.

India exported components worth $10.2 billion in FY2014, according to the Auto Component Manufacturers Association.

After declining for two years in a row, car sales in India rose 5% to 18,76,017 units in fiscal 2014-15.

Sales of trucks and buses fell 2.83% while two-wheelers expanded 8%.

For auto component makers, help also came in the form of a recovery in the US, a key market, and an efficient management of working capital and costs.

Bhaskar Som, head, IRR Advisory Pvt. Ltd, a subsidiary of Fitch Solutions, said most of these companies embarked on an aggressive expansion plan before the financial crisis of 2008 and found themselves saddled with excess capacity and inefficient cost structures.

But the crisis prompted many of them to cut flab and revisit their processes and systems. “They focused on improving their cost structures through the downturn,” said Som.

Cumulatively, net profit of auto component firms advanced at a brisk 23% to Rs.11,928 crore, the highest in five years, shows data from Capitaline. The fiscal year also saw operating margins expand 11.14%—the highest since fiscal 2010-11.

In contrast to the ancillary suppliers, vehicle makers recorded muted growth. During FY2015, the cumulative net profit of eight firms fell 4% to Rs.27,399.04 crore. Their operating margins also dropped to 12.70% from 13.14% a year ago.

While increasing competitive intensity and depressed demand in rural markets dragged down earnings at two-wheeler firms, low volumes and high selling costs nibbled into the profits of passenger vehicle makers.

Cumulative earnings at the auto component suppliers were primarily led by either those that draw a significant portion of their revenue from overseas operations or the ones for whom exports are a big contributor.

Of the 117 companies, the top 20 firm contributed to 80% of the ancillary industry’s profits. The pack was led by Bosch Ltd, the local arm of the German auto component maker, which reported a net profit of Rs.1,337.65 crore in the year ending December, against Rs.887 crore a year ago.

Motherson Sumi Systems Ltd, which draws 85% of its revenue from overseas operations, saw its net profit rise 12% to Rs.862 crore in fiscal 2014-15 compared to the year before.

“A sharp focus on costs helped to mitigate the slow off-take in the domestic market,” G.N. Guaba, chief financial officer at the firm, said. Softer commodity prices aided in better working capital management, he added.

Chandresh Ruparel, managing director at investment banking firm Rothschild (India) Pvt. Ltd, said the global diversification strategy adopted by Indian auto component firms helped them achieve parity with vehicle makers rather than being subservient to them.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.