Edelweiss predicts a stronger auto component sector

Edelweiss predicts a stronger auto component sector

Mumbai: The Indian auto component sector that has underperformed over the past several quarters is expected to witness stronger outsourcing trends and robust domestic demand growth in future, an industry analyst said.

“We believe that growth expectations are still justified. However, the long product development cycles inherent to the export market and high capex requirement for expanding capacities has affected the performance of the sector in the recent past. We believe the performance is likely to improve significantly going forward," Edelweiss Securities’ analyst Ashutosh Goel said in the company’s research report here.

Auto component firms with significant investments towards capacity expansions will be in a position to capture this growing demand, he said.

However, Goel said, given that a growing part of the domestic auto part story is based on exports, there have been concerns on the impact of rising rupee on margins.

“We believe the industry can absorb a gradual and orderly appreciation of 3-4% in the rupee, without hurting margins, through productivity gains, improving economies of scale, reasonable pricing power, higher value addition through design and engineering services," Goel said.

“Also, given that input costs account for 60% of revenues of component producers, they enjoy a natural hedge to that extent against an appreciating rupee. In fact, the composition of exports has shifted significantly in favour of the Euro, which has been relatively strong against the dollar," he said.

"In our estimate, a 10 per cent of rupee appreciation against the dollar affects FYO9 earnings by 1-12% for select auto companies," Goel added.

Also according to the the report the next wave of outsourcing was around the corner.

“We believe that the industry is at the cusp of a significant growth spurt, led by large players, on the basis of three reasons: First, some of the most aggressive outsourcers such as GM, Ford, and Renault-Nissan are increasing their presence in India with plans to introduce some of their global production models in the Indian market, which will enable them to substantially scale up their India components purchasing," Goel said.

Secondly, “The large auto component manufacturers have already invested in expanding capacities and created a global footprint through acquisitions, which will enable them to undertake large export orders," he added.

We also expect a significant growth in domestic auto manufacturing itself, led by the entry of new players, a slew of new product launches over the next 12 months and increasing vehicle exports," he said.

Over the past few years, players like Bharat Forge and Sona Koyo have built capacities and capabilities, both organically and inorganically, Goel added.