Mumbai: Valuations of Indian auto component firms have taken a beating, creating an environment where access to fresh capital is getting difficult, especially for new players waiting to tap the capital market.
“We believe there is some level of overcapacity in the short term as there has been significant investment going into the sector the last couple of years,” said Kumar Kandaswami, senior director, Deloitte India. “Fresh investment must be sought for purposes other than just capacity expansion. Where companies do not have a strong story for seeking investments or making initial public offerings (IPOs), they will find it difficult to get the right price.”
Endurance Technologies Pvt. Ltd, which makes castings, shock absorbers and clutches and has plants in India, Germany and Italy, is expected to list its shares and provide an exit opportunity for its investors, including Standard Chartered Private Equity, which put in Rs150 crore in 2006.
“We are raising various fund- raising options and we will inform you after we have ascertained the appropriate course of action,” Endurance spokesman Biswajit Choudhury said.
“There’s a bunch of companies going for IPOs,” said Avendus Capital’s executive director Preet Mohan Singh, adding that the high prices at which investments were made in these firms and the current low valuations would make exit opportunities difficult for their investors.
“I don’t see the institutional players on the equity side very interested in this sector. They’ve not made money because their entry valuations have been very high,” he said.
Others waiting for a listing are Varroc Engineering Pvt. Ltd, a large supplier to two-wheeler maker Bajaj Auto Ltd, and Sandhar Locking Devices Pvt. Ltd, in which UK-based private equity firm Actis has invested.
After a scorching pace of growth early in the decade, the automobile sector hit a speedbreaker in mid-2008 when the global credit crisis led to a slowdown in the economy, while rising interest rates and lack of funds squeezed demand.
However, the situation is not totally bleak.
“Anecdotally, one understands the sector is making its supply chain more efficient. This should make the sector more interesting to investors,” said Kandaswami.
Some level of interest is returning, albeit slowly, from private equity firms and institutional investors, as signs of revival in the capital markets and renewed demand in the auto sector hold out prospects of growth.
“From an investment point of view the auto components sector looks positive in the long term because companies are posting good results,” said V.S.R. Sastry of First Call India Equity Advisors Pvt. Ltd.