New Delhi/Mumbai: Indian auto parts makers are diversifying into sectors such as defence, aerospace and railways as a buffer against the drop in vehicle sales and a slowing economy, having learnt from the global slump four years ago.
“As a businessman, it is always better to reduce your dependence on a particular thing,” Sunjay Kapur, vice-chairman of Sona Koyo Steering Systems Ltd, said in an interview. “In our other group companies, we do want to look at diversification. I don’t see why we should not look at other engineering, manufacturing fields. We started looking at it back in 2008, when we went into the downturn.”
Indian car sales dropped 1.5% in the first 10 months to January this fiscal, according to the Society of Indian Automobile Manufacturers (Siam), after growing at least 30% in the last fiscal year. Siam has lowered the sales forecast for this fiscal, the third time in a row in this fiscal year that this has happened, to 0-2% in January from 2-4% in October.
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With car sales falling, Mint’s Amrit Raj says Indian auto component makers are diversifying into other sectors like defence, aerospace and railways.
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India’s economic growth is estimated to slow to 7.4% this fiscal from the expansion of 8.4% in the year before. Siam, however, expects that car sales will revive to 11-13% growth in the next fiscal.
Kapur said his company will look to supply farm equipment parts as part of its diversification programme.
“We think we have products to offer to tractor makers,” he said. “We should start supplying to them in the next financial year.”
It won’t require another plant for this purpose, he said.
Non-auto sectors such as power, oil and gas, aerospace and railways offer better margins, and it makes sense for companies to diversify into them to beat the cyclical nature of the auto sector, said Surjit Singh Arora, an analyst at brokerage Prabhudas Lilladher Pvt. Ltd.
“The margins in the non-auto components are higher at least by 200-300 basis points,” he said, citing Bharat Forge Ltd, which has de-risked itself by getting into heavy forgings and other critical parts for nuclear power plants, the capital goods industry and aerospace, among others.
Arora said, however, that such initiatives do not pay off immediately and the gestation period could be as long as five years. One basis point is one-hundredth of a percentage point.
Parts maker Amtek Auto Ltd plans to increase its sales contribution from defence and railways to 30% in the next three-four years from 6-7% now.
“We are setting up a wagon factory in Rajpura (in Punjab) through a joint venture,” said Santosh Singhi, chief financial officer. “We already supply to railways, but we want to increase the share of defence and railways in our net sales.”
Anand Automotive Ltd, a Delhi-based auto component maker, plans to venture into defence equipment and is scouting for a potential partner, chief executive officer Deepak Chopra told Mint last month.
“The recent MMRCA (medium multi-role combat aircraft) deal will open up a lot of opportunities in the defence equipment sector,” Chopra had said, referring to the purchase of jet fighters for the Indian Air Force. “We don’t want to miss out on that. We are doing a feasibility study and trying to find a partner to get into the sector.”
Most defence deals involve offsets, which require that contract winners have to move some of the manufacturing to India. The country has also been seeking to encourage greater private sector involvement in defence manufacturing over the past few years.
The Automotive Component Manufacturers Association of India (Acma) lobby group recently set up a committee to promote such activities.
The panel “encourages ancillary firms to diversify into aerospace, railways and other sectors”, said Arvind Kapur, Acma president.
While few say they are planning to curtail investment, most don’t want to be taken by surprise, as they were in the aftermath of the 2008 global financial crisis.
NK Minda Group is not cutting back on investment, but is being cautious, said the chairman of the company named after him.
“What we have put on hold is the land procurement plan for future expansion,” he said.
Some company bosses say a wholesale rethink is advisable.
“The business is not as bad as the sentiment,” said A.K. Taneja, managing director and chief executive of Shriram Pistons and Rings Ltd. “Moreover, we cannot react and change our business plans on a quarterly basis.”
Some companies are increasing backward integration to cut costs.
Amtek Auto, for instance, is buying a steel plant. “We want to have our own steel plant so that we can keep our raw material expenses in check,” said Singhi.
Kapur of Sona Koyo is also following the same principle.
“We had outsourced a lot of components. Now we have got them back in-house. That’s like a cost-cutting exercise. This way you get to save on freight, tax and other economic aspects,” he said.
The company has set up a pressure dye-casting unit as part of this exercise. “It’s like capturing the choke point, that’s what we call it,” Kapur added.
amrit.r@livemint.com
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