Supreme Treves & Craftsman Automation say nothing has been finalised

Private equity fund Everstone Capital is in talks with auto-component makers Supreme Treves and Craftsman Automation to purchase a minority stake, two people familiar with the development said.

?The matter is between us and them (Everstone Capital) and I have nothing else to comment,? said KD Hiranandani, head of finance for Mumbai-based Supreme Treves, which makes interior components for cars.

?They (Everstone Capital) have certainly visited our site but nothing has been finalised,? said K Gomatheswaran, whole time director at Craftsman Automation, a Coimbatore-based auto-component maker.

Fresh PE investment will also make way for partial or full exit of International Finance Corporation, the funding arm of the World Bank, which had earlier invested R50 crore a few years ago in Craftsman to expand capacity.

?Supreme Treves is seeking a value of R460 crore and Craft around R500 crore to sell minority stake in their companies,? an executive from a PE fund, who had earlier shown interest in these companies, said.

?Everstone will soon sign a term sheet with the two companies,? one of the two persons quoted above with direct knowledge of the matter said. A buyer signs a term sheet as a pre-funding agreement which offers a framework of proposed transaction terms and can start due diligence on target companies.

PE funds? renewed interest in auto-component makers signals India?s push to become the world?s fifth largest auto-component maker as car sales rise with higher disposable income.

?India is soon expected to be the fifth largest automotive market in the world and the market is only going to scale from here,? said Rakesh Batra, partner and national leader ? automotive practice at consulting and audit firm Ernst & Young.

PE and Venture Capital Funds had invested $218.5 million in 10 auto-component makers between March 2011 and now, data from VC Circle, data provider on M&A and PE transactions shows.

Consultants and bankers say more money will flow into auto-component makers as they expand overseas.

?Indian players are making bigger inroads in the global auto sector because the slump of 2009 has led to sale of a number of auto-component players,? said Chandresh Ruparel, managing director at investment banking firm Rothschild (India). ?We are seeing more sensible auto companies now who are not willing to pay huge valuations for acquisitions. This gives the PE players an opportunity to invest for sensible takeovers,? he added.

?I would expect more investments in this sector because these companies need capital to grow and have aspiration to become global,? Batra said.

Ruparel said at least three to four Indian auto-component makers are likely to cross $1 billion in revenues soon by diversifying into other components as well. ?Many specialised small auto-component firms are also likely to attract investments if they become value-added players through specialised products or services.

But these companies are challenged by lack of skilled manpower, inadequate logistics infrastructure and heavy dependence on a slew of buyers.

?It is difficult to get back on the growth trajectory with other key issues like lack of availability of skilled manpower and infrastructure around logistics,? said Batra. ?The auto sector generally gives lower return on capital employed and the dismal financial performance of the sector may keep PE away.?

Rising commodity prices and pressure of lowering prices by original equipment manufacturers have led to shrinking margins for auto-component makers, combined with low sales volume,? said Ruparel.

?When an auto manufacturer, who has promised certain sales figures, is unable to reach that target, the auto-component maker associated with him also suffers huge losses.?

?If there is an increase in the excise duty structure in the budget it will further add to the existing woes,? he added.