The lockout at Maruti Suzuki India Ltd’s Manesar factory has made component suppliers nervous. With no solution in sight nearly a fortnight after the lockout was declared, Maruti’s suppliers concede that it will affect their production schedules. This, in turn, will hit their revenue streams, cash accruals and profitability.
The worst hit will be tier-I suppliers to Maruti, especially those with greater dependence on its Manesar facility. The unit, which makes models such as the Swift, DZire, SX4 and A-star, accounts for around one-third of the car maker’s total production volumes. A report by rating agency Icra Ltd, which puts 14 vendors on “rating watch with developing implications”, explains that the overall average realization of components related to these four models is higher than those of the components that go into the models produced at Maruti’s Gurgaon (Haryana) plant.
A parallel can be found in the period of labour unrest that disrupted about 72 days of production in 2011 and translated into a potential sales loss of 40,000 vehicles in fiscal 2012. At the time, the effect on large vendors was clearly mirrored in their profit and loss account. For instance, Jay Bharat Maruti Ltd, which is among Maruti’s largest component joint ventures, posted a 7.5% and an 11.5% year-on-year dip in revenue in the September and December quarters, respectively. Net profit nosedived 86% in each of these quarters. Sona Koyo Steering Systems Ltd, too, saw a contraction in revenue and profit around the period. Other listed entities affected include Lumax Industries Ltd, Subros Ltd and Halonix Ltd (formerly called Phoenix Lamps Ltd). Of course, high raw material costs and the rupee depreciation worsened the situation. Media reports indicate that this time around, the lockout and the production shutdown will hit about 600 units that are a part of Maruti’s supply chain, given that the company is the country’s largest car maker with a 39% market share in passenger vehicles. Worse, it coincides with sluggish growth in the business.
The production cutback will hit cash accruals of vendors. With most of them working on thin margins in original equipment supplies, lower cash accruals could see component makers struggle to cover variable costs.
Even otherwise, the interest cover (the number of times the profit covers interest expense) of auto component makers with a large exposure to original equipment is relatively low. Analysts say that if the lockout is prolonged, it would hit operating leverage, too, given that most component makers had ramped up capacities in the last two years.
In spite of these adversities, Maruti vendors are unlikely to switch loyalties as it remains the undisputed market leader, which guarantees strong volumes to vendors in normal times.
That said, auto component firms with a diversified customer base or geographic spread would be better off. For instance, battery and tyre makers have nearly 65-70% of their revenue accruals from the replacement market, with better profit margins in that segment, too. Some, such as Motherson Sumi Systems Ltd, although a large supplier to Maruti, will see less impact on its profitability because a little over three-fourths of its revenue comes from its overseas operations.
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