Most of the auto ancillary companies scrips have rebounded sharply in the past one year or so. This is owing to the overall recovery in the auto sector and the growing domestic demand from original equipment manufacturers (OEMs), which contributes about 65% to revenues of auto ancillary companies.
According to Crisil estimates, in 2009-10, both the auto and auto component industries have witnessed 25-30% y-o-y growth. Within automobile, passenger cars and commercial vehicles registered 27% and 34% growth, respectively.
Margins of auto ancillaries have improved y-o-y from 12-13% in 2008-09 to 15-16% in 2009-10. ?One reason for this is that utilisation levels have improved significantly, helping reduction in fixed cost per unit of product,? said Manoj Mohta, head, Crisil Research. He adds that operating margins have improved in 2009-10 as raw material prices have reduced by 13-15%.
In 2008-09, auto component companies had reduced their production levels and even shut down certain capacities due to reduced demand from OEMs, exports and a subdued replacement demand.
Analysts reckon the outlook for the sector is positive. In terms of revenues, the industry is estimated to grow at 15-17% y-o-y for 2010-11. ?To achieve optimum growth, companies will have to keep raw material prices in check and manage their currency hedging,? said Prayesh Jain, research analyst, India Infoline. Raw material prices are expected to go up by 13-15%, which may impact the margins of these companies for 2010-11 by 50-70 bps, Mohta adds.
Considering that firms like Hyundai and Ford are setting up car exporting hubs in India, domestic demand is expected to be robust. But it might lead to a shortage of components. ?Auto ancillaries are working at 90% of their utilisation levels and may not be able to meet supply requirements,? Vaishali Jajoo, senior analyst – auto and auto components, Angel Broking said. Another concern is that they have not added significant capacity over the last year. And while domestic demand has picked up, exports are reeling. According to analysts, exports contribute almost 50% of revenues to companies like Bharat Forge and Amtek Auto. ?In the US and Europe, volume growth has been above historical lows achieved in FY09 but is nowhere close to levels seen in FY08,? said Jain of India Infoline. The US and Europe constitute about 65% to exports of these companies and the current eurozone crisis might hit export growth by about 15% y-o-y, experts believe. ?It will take at least another year for exports from these countries to recover,? said Jajoo.