India growth story is likely to shine brighter in auto ancillary industry

By D K Aggarwal

After a challenging FY14, the auto ancillary industry has rebounded during FY15 on the back of a recovery in domestic demand and, to some extent, due to better exports. The industry, which contributes approximately 4 per cent to India’s total exports, registered a satisfactory growth of 8.8 per cent in 2015-16.

Top lines showed good single-digit growth while bottom lines accelerated on the back of higher other income, lower interest cost and steady depreciation charges. The margin, too, witnessed good improvement.

Some of the companies such as Exide Industries, Suprajit Engineering and Wheels India, to name a few, have witnessed modest growth in the recent quarter.

Exide Industries reported a 25.9 per cent increase in net profit at Rs 196.05 crore for the first quarter ended June 30, as demand for both automotive and industrial batteries improved. Wheels India’s profit (standalone) nearly doubled to Rs 14.62 crore.

The management of Suprajit Engineering expects its revenue to grow 40 per cent YoY, led by industry growth and market share gains.

Coupled with growing demand and technological advancements, the industry has emerged as a significant contributor to the global automotive supply chain.

Domestic auto ancillary companies have benefited significantly from the entry of global OEMs through exposure to global standards and technology by forming tie-ups with foreign suppliers.

General Motors, Toyota, Ford, Fiat, Honda, Hyundai, and Volkswagen are some of the global automakers that import critical components from India as the Indian ancillary industry has the holistic capability to manufacture an entire range of auto components.

However, margins in the replacement market are higher than OEM market.

Future Outlook:
With signs of recovery in the auto market in the country (as it will translate into huge potential for the auto ancillary industry), coming of the seventh Pay Commission award, favourable interest rates and a general improvement in per capita income and prospects of better monsoon, it is expected that the auto ancillary industry will see good growth in early double digits this year.

Moreover, the implementation of the GST from next financial year would open new prospects for the auto ancillary companies, which usually set up their units closer to original equipment manufacturer (OEM) facilities just to avoid VAT credit chain.

GST is expected to impact vehicle pricing, sourcing strategies, distribution costs and dealer profitability. It is anticipated that consolidation of these facilities would be beneficial for the overall economic efficiency of the auto industry.

The advent of a good monsoon, which has been as per the prediction till now, has created positive sentiment in the economy.

Moreover, with the Modi government’s mission to make India an export hub for automobile, it is expected that the organised sector, which holds a market share of 15 per cent, will see higher growth than the unorganised sector.

Though the market share of the organised sector is mere 15 per cent, it accounts for 85 per cent of total industry turnover. Beside this, regulations (ease of doing business) and government initiatives such as ‘creation of Smart Cities’, ‘Skill India’, ‘Digital India’ etc. will support India’s development as a world-class manufacturing hub. This, too, will play a significant role in driving growth of the Indian auto ancillaries industry.

(The author is Chairman and MD, SMC Investments and Advisors Ltd. Views and recommendations given in this section are his own and do not represent those of ETMarkets.com. Please consult your financial adviser before taking any position in the stock/s mentioned.)