Top private equity (PE) firms such as Temasek, Blackstone, Goldman Sachs, Samara Capital and Baring Private Equity Asia are actively exploring investment opportunities in India’s auto parts manufacturing sector, three people aware of the developments said. The firms are confident about the long-term potential of India’s auto parts industry to cater to the local markets and overseas. Hence, they want to capitalize on the low market valuations of most of these auto parts vendors due to covid-related uncertainties to buy minority or controlling stakes. The firms are scouting for makers of parts for internal combustion engine vehicles, and electric mobility.
According to the first person mentioned above, the PE firms have approached some companies based in the automotive hubs of Chennai and Pune in the past few months.
Most auto component manufacturers are under financial stress due to a precipitous drop in vehicle sales since FY19, aggravated by the lockdown since March-end. This has left promoters with a dire need of funds to ramp up production and invest for the future but weak demand and depressed valuations have limited their options. Banks and other financial institutions are also wary of extending credit due to fear of loans turning bad. Some promoters are concerned about taking on fresh debt, making PE investments a more viable option.
“The current fiscal will be a tough one for the auto sector since sales were down by almost 18% last fiscal. Also, most promoters have invested heavily because of the upgrade to Bharat Stage VI norms. So most of them will need partners who can guide them on investment and acquisitions in the long term as well as provide capital in the short and medium term," said the first person, requesting anonymity.
According to a survey of the top 300 auto parts makers by ratings agency Crisil, combined revenues of the sector are likely to drop 16% this fiscal due to the coronavirus-induced economic slowdown. Ebitda or earnings before interest, taxes, depreciation and amortization of these companies is expected to drop 30-35% in FY21.
“Possibly for the first time in over a decade, we are seeing demand from OEMs, exports and the aftermarket in the red this fiscal, in addition to demand slowdown for two consecutive years," said Anuj Sethi, analyst, Crisil.
The second person cited above said promoters of auto component companies are also looking for opportunities outside India, especially in electric mobility, and the presence of a global PE investor on board is likely to help in arranging capital and other aspects of managing operations overseas.
“PE firms always look at the long-term potential and India is the only market expected to grow in the next decade as markets like China and US had already slowed before the pandemic. Most PE firms have also realized that current valuations make these companies quite lucrative and promoters also need capital. We expect consolidation in the component industry in the next two years," said the second person, declining to be named.
Queries emailed to Samara Capital, Temasek Holdings Advisors India Pvt. Ltd and BlackStone Private Equity remained unanswered. Spokespersons of Goldman Sachs and Baring declined to comment.