Domestic auto ancillary making companies are among the focus sectors for Edelweiss Broking this year, as it sees significant upside for the companies that derive major part of revenues from international operations.
“Domestic players have transformed from Tier 2 supplier to global component solution provider in last one decade,” the research and brokerage firm said in a recent note.
Edelweiss said that the industry production has more than tripled in the last one decade, from $12 billion in the financial year 2005-06 to $39 billion in the financial year 2015-16. Meanwhile, exports have risen by a staggering 11 times during this period. The share of exports in the industry’s total turnover has also increased to an impressive 2.3 times, from 12% in 2005-06 to 28% in 2015-16, Edelweiss said.
Domestic auto ancillary makers’ move to the next level in the global markets has been helped by the healthy acquisition spree, Edelweiss said, noting that the total value of acquisitions by Indian companies in the space rose exponentially in the last 12 years, from Rs 500 crore in the the calendar year 2005 to Rs 10,600 crore the year 2016. The number of deals in this period rose from 14 to 112.
Earlier last month, Motherson Sumi Systems said that it is all set to buy Finland-based truck wire maker PKC Group for about $609 million to expand its product portfolio and market presence.
As for valuations, the “strong performance in domestic market and exports has fueled growth in profitability” for the domestic auto ancillary players, the research and brokerage firm said, adding that these companies’ revenue has increased to almost nine times, from Rs 1,084 crore in the financial year 2005-06 to Rs 9,585 crore in the last financial year 2015-16.
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The return on capital employed too, while it has fallen from 22%, is robust at 16% considering the growth in the size of the industry. The strong profitability, led by domestic and international performance, has helped to keep balance sheet strong and target lucrative international business for acquisition, Edelweiss said.
While inefficient cost structure and tough market scenario has stressed profitability of international auto comp manufacturers, it has led to attractive valuation for small and medium sized international auto component companies, Edelweiss said.
Going forward, the international business business will drive growth for the domestic auto component makers, in line with the ambitious targets of the Automotive Mission Plan 2016-2026, which seeks to boost OEM exports to at least Rs 223,300 crore (base case) by fiscal 2025-26 from Rs 62,500 crore in the fiscal 2014-15.