What’s driving the deal-making frenzy in auto components sector?
The industry is undergoing transformational changes led by themes of electric vehicles, shared mobility, safety
Over the last 12 months the auto parts sector has seen heightened funding and acquisition activity, with over 15 transactions in 2018. This is more than double that of 2017. The focus on the sector is driven by strong tail winds driving impressive growth across vehicle segments.
Apart from the speed-bump faced by the sector over the last couple of months, all sub-segments, including passenger vehicles, two wheelers, commercial vehicles and tractors grew at double digits. This is the first time such uniform growth has been seen in a decade.
Additionally, there has been a lot of focus and funding activity in the electric vehicle ecosystem in India.
Robust agrarian growth, increasing consumer preference for premium variants in urban India and successful product launches have supported the positive momentum in the sector. Moreover, the knee jerk impacts on account of demonetisation, GST implementation and BS IV transition were absorbed quickly with long-term favourable dynamics rapidly restoring the growth momentum. Apart from local demand, global demand also showed no signs of slowing, helping Indian companies.
The strong outlook for the automotive sector has resulted in some keen interest from institutional investors in the auto-component sector. This has been evidenced by some large bets being made by private equity funds in this sector. Some of the recent buy-out transactions include Blackstone’s acquisition of Comstar and Kedaara Capital’s acquisition of Sunbeam Auto.
Apart from fresh investments, there have also been several profitable exits in the last few years, with some of the more noteworthy ones being KKR’s sale of Alliance Tires to Yokohama, Kedaara Capital’s exit from Bill Forge to Mahindra CIE and Actis’ exit from Endurance in a very successful IPO.
Since the acid test for private equity investors lies in being able to profitably exit their investments, these transactions have instilled a lot of confidence in the sector. While there have been several minority investments as well, such as Motilal Oswal’s recent investment in Happy Forging, there seems to be a clear trend towards taking controlling positions and even outright acquisitions. Given the imminent consolidation in the industry brought about by OEMs aggressively reducing their number of suppliers, many buyout funds now see these companies as platforms for consolidation through a series of bolt-on synergistic acquisitions.
Apart from the financial rationale, there are other factors driving fund raising and M&As in the sector. The automotive industry, not only in India, but globally, is undergoing transformational changes led by the central themes of electric vehicles, shared mobility and safety, and the adjacent themes of light weighting, fuel efficiency, tighter emission norms and connected cars. While the on-ground impact of some of these themes are very limited as of now, they have the long-term ability to disrupt the sector more fundamentally than anything that has been witnessed over the last several decades.
Succession issues have also played an important role in driving M&As in the sector. Several first-generation entrepreneurs, who started their businesses in the eighties, supporting OEMs such as Maruti and Hero Honda are now at a stage where they are considering passing the baton to the next generation or hanging up their boots. In situations where the next generation isn’t keen to continue in the business, a strategic exit becomes a natural choice.
Randhir Kochchar is partner, transaction advisory services - automotive, EY India.
- Auto dealers feel the squeeze as vehicle registrations fall
- Honda to hike vehicle prices by up to Rs10,000 from next month
- Car market in India continues to move in the slow lane: Report
- Audi plans to introduce compact electric crossover to broaden Tesla assault
- NGT asks Volkswagen to pay penalty of Rs 100 crore in 24 hours
Editor's Picks »
- 2nd Trump-Kim summit to take place at end of February
- To boost confidence in oil cut, OPEC issues quota list
- China said to offer path to end US trade imbalance
- BlackRock, Goldman said to move some fund managers to US if no-deal Brexit
- RBI governor Shaktikanta Das sees inflation assessment as a challenge
- What to expect from Q3 results of IndiGo, SpiceJet, Jet Airways
- Forget privatisation, govt has hugged its banks tighter
- Flat profit, rising debt are growing worries for Reliance
- Q3 results: HUL growth off a high base shows it’s on a roll
- DCB Bank Q3 results: Small loans give big pain as farm, mortgages lift delinquencies