The resurgent domestic auto sector has taken component makers by surprise. Will they be able to step up supplies and cash in on the auto boom? Or will capacity constraints challenge growth?
Estimates on the growth potential are optimistic. According to Crisil Research, the industry will grow by 15-16% in fiscal 2011 and 17-18% in fiscal 2012. Projections are based on a 17% demand expansion from domestic OEMs (original equipment makers) across all segments in the auto sector.
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Component makers will also have to meet the demand from overseas markets, which industry experts say has bottomed out. There has been a slowdown in European markets in the last few quarters. But global auto industry data from Ward’s Auto indicates that capacity utilization in the US from January to June almost doubled to 66% from a year ago.
Market research firm JD Power estimates that production in the US will improve to 11.8 million units in 2010, from 10.4 million units in 2009. The European Union and the Nafta (North American Free Trade Agreement) region account for nearly three-fourths of India’s component exports. The only tempering factor is the slowdown in European markets. Component firms will, therefore, have to step up production and capacities.
“They will have to invest about Rs60,000-65,000 crore over the next five years,” says Manoj Mohta, head of Crisil Research.
That’s a tall order. Larger companies have been quick to move on capacity expansion. For example, Apollo Tyres Ltd and Exide Industries Ltd are setting up new capacities. Amtek Auto Ltd had made several acquisitions between 2002 and 2007.
What could be a roadblock to expansion, however, is the small and fragmented nature of the industry. Data from the Automotive Component Manufacturers’ Association indicates that only 40 firms (out of its members) have annual revenue above $100 million (Rs4,68 crore). Small firms find it hard to raise funds for expansion. Some analysts reckon that a large number of component makers already have high leverage, which may hinder easy access to funds. Also, there is a time-lag in additional component manufacturing capacity going on stream. The question is whether the growth rates in the auto segment will be sustained to support expansions over a longer term. So far, component firms are registering higher capacity utilization levels. This should improve cash flows to support capital expenditure for expansions. “We expect capacity expansion worth Rs13,000 crore (on an aggregate basis) in fiscal 2011,” adds Mohta.
Graphic by Naveen Kumar Saini/Mint
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