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PE firms steer away from Indian auto parts makers

PE firms steer away from Indian auto parts makers
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First Published: Tue, Aug 14 2007. 12 40 AM IST
Updated: Tue, Aug 14 2007. 12 40 AM IST
Private equity (PE) firms are shying away from investing in auto parts makers citing muted medium-term growth potential, but experts said the long-term outlook remained positive.
PE investment was likely to return once the sector tides over its current problems: falling domestic demand amid sluggish auto sales, and high interest rates and stunted export growth, thanks to a hardening rupee, they said.
“Manufacturing used to be the second most favourite sector for PE investors for almost two years, and now it’s nowhere in the top five,” said Arun Natarajan, chief executive at Venture Intelligence (VI), which tracks PE deals. One-third of all manufacturing deals used to be in the auto components sector, he added.
PE firms invested about $215 million (Rs875 crore) in nine auto parts makers in 2006, but have managed to put in just about one-third of that in three firms so far in 2007, according to VC Circle, that tracks India’s deal economy.
Warburg Pincus, New Vernon PE, Standard Chartered PE, DE Shaw Group, International Finance Corp., Actis Advisers Pvt. Ltd, IL&FS Investment Managers Ltd are some of the PE investors in the sector.
“The rise in interest rates had a dampening effect on auto demand, which has led to some auto component companies deferring fund-raising,” said Nainesh Jaisingh, head of Standard Chartered PE in India. Standard Chartered PE invested $33 million in unlisted Endurance Technologies in August. “Irrespective of such immediate issues, firms will invest in capacity and inorganic growth. Fund-raising will be a natural corollary,” he said.
“The likelihood of depressed profits is turning the sector at large unattractive. But I still see PE interest in firms that have outperformed,” Amtek group chairman Arvind Dham said over the telephone.
Warburg Pincus invested $65 million for a 9% stake in Amtek Auto in August 2006.
Car sales growth slipped to 12.3% in April-July, from an average growth of 20% over the past two years, and two- wheeler sales fell 9.2% during the four-month period, according to the Society of Indian Automobile Manufacturers.
Industry experts reckon PE firms could be waiting for returns from their past investment before infusing more.
“It could also be that most of the mid-sized players amenable to PE have been taken and the industry is waiting to digest those investments,” VI’s Natarajan said.
“Companies have not gone ahead and taken the challenge. There are very few compelling growth stories,” the head of a top auto component group said on condition of anonymity. “The mere expansion story is over.”
Most of the PE funds were used to fund overseas acquisitions, New Vernon’s Rajiv Sahani said. New Vernon invested $10 million in Amtek India Ltd in August 2006.
Rising valuations of foreign firms have spooked acquisition plans, analysts said. While firms could be bought for as low as three times core earnings earlier, the asking price has more than doubled with rising appetite from Asian firms, they added.
“PE investors are still knocking at our doors. It is just a timing issue. It will even out over the next few quarters,” Sona Koyo Steering Systems Ltd chairman Surinder Kapur said. The Sona group was one of three auto parts makers that attracted PE in 2007. JM Financial invested $28.5 million in Sona’s holding firm.
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First Published: Tue, Aug 14 2007. 12 40 AM IST