Slowing automobile sales make component makers in India more cautious

Domestic passenger vehicle sales dropped marginally in December, even as car sales declined 2%

Automobile component makers in India are treading with caution on expansion and investment. Thanks to the sluggishness in vehicle sales, the coming elections and transition to Bharat Stage VI   emission norms, set to create demand uncertainty.

Nirmal Minda, chairman at Minda Industries, said his company was taking a “month-on-month call,” not deferring it for six months to a year in one go. “The situation is very volatile and one has to be careful. It is important to tighten the belts,” he said. Others spoke similarly.

Domestic passenger vehicle sales dropped marginally in December, even as car sales declined two per cent. The fall, fifth in six months, came on the back of stock piling up at dealerships, in turn was led by tepid sales during the earlier festivals.

“Based on the cut in customer forecast, we are revisiting our expansion and looking at consolidation,” said Deepak Jain, chairman, Lumax Industries. The company counts Maruti Suzuki and several other car and two-wheeler makers as  customers. It has pared capital expenditure (capex) by Rs 50 crore for the ongoing financial year, to Rs 200 crore.

Looking at the uncertainty ahead, some are strengthening their presence in non-automotive sectors. Take TVS Group’s Sundram Fasteners (SFL). Arathi Krishna, managing director, said they had allocated almost Rs 500 crore in capex for 2019-20. But, the bulk of this will be spent on improving the market share in non-automotive businesses, including defence and aerospace, and entering new regions.

“Multinationals are attracted to India but only we know how difficult it is to operate here,” says Krishna, on the advantage of being a home-grown company. “Overall, I am optimistic and expecting double-digit growth.” SFL has 27 facilities across the world, including one in China; it is considering the erection of a new one in America. It is also expanding its print in the electric vehicle (EV) market, via partnerships with EV makers, at the design stage itself. Currently, 30 per cent of SFL’s portfolio is geared to the EV market.

Others are more cautious in their outlook. “There are indications that the market will be down for a long time. To me, one year is gone,” said F R Singhvi, president at Bengaluru-based Sansera Engineering. He says they were to make an initial public offering of equity in November but he now did not see this happening even by July or August this year, given current volatility.

Some are using this period to prepare better for the future.  Ashok Taneja, chief executive at Shriram Pistons, said while the company had not revised its medium to long-term plans, it was taking steps to contain costs and manage its business differently. “To the extent you have unutilised capacity, you use this time for carrying out all the maintenance work, re-doing the layout, etc. You can tell people to take time off. In any company, there’s always some non-essential expenditure.  You start doing what is essential,” he said.

Rating agency CRISIL’s analysis of 225 automotive component firms (accounting for a little over 60 per cent of sector revenue of Rs 3.2 trillion in 2017-18) shows their capex in FY17 and FY18 rose around a fifth when compared with the preceding two years. Anuj Sethi, senior director at CRISIL, said despite this high base, capex across sub-segments would remain elevated until FY20. Driven by regulatory changes necessitating technology upgradation and product development (35-40 per cent of spending), even as a majority of the expenditure would be on more capacity.

Investment in technology continues. Dharmesh Arora, chief executive at Schaeffler India, makers of engine, transmissions, says they will invest Rs 460 crore this year. Over the next three to five years, would continue to do so on expanding plant capacities, product portfolio and engineering capabilities. The company has seen slowing of the passenger vehicle segment in the last three months of 2018 but he anticipates a turnaround as the current year progresses. The investments are planned towards both the industrial and automotive sectors, he said.