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Auto ancillary sector could do well in 2011

Monday, January 31, 2011
By Manik K. Malakar

The automobile industry in India has posted a rather good performance in the past few months and one of the sectors that is benefiting from the downstream good effects is the auto ancillary sector that supplies inputs to build automobiles.

So hunky dory are things for the sector is that things like interest rate hikes and raw material hikes would be temporary glitches for the sector. “The growth in auto sales volumes has resulted in a significant improvement in capacity utilisation and operating cash flow for the auto suppliers,” said Pragya Bansal, an analyst with Fitch Ratings. The Ratings agency feels that India’s auto suppliers will in 2011 have stable and may in face have better prospects on the back of improved profitability and better demand.

“The auto ancillary industry gets demand from OE (Original Equipment) manufacturers and the replacement market,” said Avinash Gupta, Vice President Research Equity, Bonanza Portfolio. OE demand is dependent on the number of new cars sold and the replacement market is dependent on the age of vehicles and number of vehicles. Whilst demand from the replacement market is expected to be good demand from OE manufacturers may face a bit of pressure. “The OEM market growth numbers would moderate a bit because of base effect,” said Gupta.

But overall, regardless of the rate of growth in the auto sector growth per se will be there. Rising industrial production, credit, and consumer confidence will all lead to a demand for autos and consequently for auto ancillaries.

And yes the global markets, which had taken a beating in the wake of the 2008 crash are expected to bounce back at least as far as automotives go. “The growth will be boosted by exports as global automotive demand picks up in 2011,” said Bansal. “The demand in the developed world is going to pick up, and in that case the demand from overseas would also come back to the industry,” said Gupta.

There are various new facets that will be coming into the industry in 2011. According to inputs from Fitch Ratings the growth momentum that started in 2010 will continue in 2011. Original equipment manufacturers would resort to aggressive marketing to get market share.

The replacement market will also contribute substantially to growth. In 2010 a combination of capacity constraints as also strong demand from OEMs mean that this demand segment will also be a focus for growth for the auto ancillary segment in 2011.

There are however some hurdles that the industry will have to face and of these imports are one. “The international trade policy that India has entered into/is negotiating with many of its trading partners could make the domestic auto sector highly competitive over the medium term. These trade agreements aim to reduce trade barriers and promote free trade across partner countries,” said Bansal.

Interest rates for vehicles have been on the rise and are currently hovering in the 15 to 17 per cent bracket. But even this will have a minor impact on the industry. “The interest rates have a significant impact in case of commercial vehicles and tractors. The effect in the personal vehicles segment is relatively smaller. The ancillary industry would be impacted accordingly,” said Gupta.

The budget that is expected to be presented at the end of February may be something that will affect the industry. An increase in excise duties would hit the industry. The most major factor would be any weakening in the demand for automobiles that would affect demand for automotive ancillary products.

But at this point of time market observers are positive on the sector. “Fitch Ratings expects the ratings of Indian auto suppliers to largely remain stable with a positive bias emerging, due to improved profitability and better demand prospects,” said Fitch Ratings Bansal.

“This is a dynamic sector of Indian economy. India is aspiring to become global hub for small cars. Indian component manufacturers are also looking for buyers overseas. In case the economy in the developed world picks up then the demand for auto and auto components could pick up. The sectors offer good investment opportunity to the long term investors,” said Bonanza’s Gupta.

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