Putting On The Brakes
Take the first half of fiscal 1998. There has been an overall decline in vehicle sales. Commercial vehicles dipped by 16.4 per cent, two-wheelers by 2.5 per cent and jeeps by 1.6 per cent over the previous period. Cars and three-wheelers saw single-digit growth of 9.3 per cent and 7.1 per cent respectively. This is much lower than the 20.6 per cent (cars) and 37.5 per cent growth in the first half of 1996-97.
The car rally is reflected in the health of the component industry. Sales grew by a mere 8.3 per cent. While there is no sharp fall in profit margins, it has definitely affected operating and gross profits of ancillary units. The performance of the 39 auto ancillaries considered in this study shows a modest 7.9 per cent rise in operating profit (OP) and 5.7 per cent in gross profits (GP). A 39.4 per cent rise in depreciation caused a 10.3 per cent decline in the net profit (NP) of these companies.
A look at the margins. Operating profit margins (OPM) remained steady at 17 per cent (17.1 per cent in the first half of 1996-97), gross profit margins (GPM) declined marginally to 13.4 per cent (13.8 per cent) and net profit margins (NPM) fell to 5.2 per cent (6.2 per cent).
The Rs 11,500 crore auto ancillary industry is classified into three major segments. Gears, including transmission gears, hydraulic and mechanical steering gears. Engine parts covers radiators, gaskets, piston and piston rings and pins, carburetors, fuel pumps, rear brake, front caliper, crankshafts, spark plugs, valves, guides and fuel injection equipment. The last segment covers an assortment of storage batteries, shock absorbers, bimetal springs and dashboard instruments.
Of the three, the gear segment was the worst hit. Here, demand comes from the original equipment market. Sales of the five gear companies studied fell by 4.5 per cent. Sona Steering and Atlas Gears, which together account for nearly 73 per cent of total gear sales, however bucked the trend. The overall OP fell by 14.5 per cent despite a rise of 48.4 per cent in other income. OPM dropped to 13.5 per cent from 15.1 per cent in the previous period. The GP fell by 24.4 per cent and the 10.6 per cent GPM was down to 8.4 per cent. The interest burden rose 8.8 per cent and total expenditure as a percentage of sales rose from 85 per cent in the first half of 1996-97 to 86.7 per cent in first half of 1997-98.
The sales of the eight engine parts manufacturers in the study, however, rose by 15.8 per cent. It was pulled up mainly because of the robust 25 per cent sales growth of Bangalore-based Motor Industries, which accounts for nearly 71 per cent of the aggregate sales of the segment. Its performance was due to its reliance on the aftermarket. For instance, 87 per cent of the spark plug demand comes from the replacement market.
Of the other engine part companies, Goetze recorded a 22.3 per cent drop in sales while I P Rings sales fell 14.6 per cent. Both were unable to withstand the recessionary pressures of a tight piston ring market.
For the engine segment, the OP rose by 20.2 per cent while OPM touched 21.1 per cent (20.3 per cent). With the interest outgo falling 2.8 per cent, the GP also posted a healthy 23.2 per cent increase while the GPM averaged 19.1 per cent (18 per cent). And the NP rose by 21.3 per cent due to a 40.1 increase in the depreciation provision.
The increase was not uniform across companies. For instance, the Rs 37-crore I P Rings and Rs 75-crore Perfect Circle Victor had lower OPMs. A 21 per cent higher interest burden caused Autolec to post a lower GP and GPM. Autolec and I P Rings were also the only two companies whose NP and NPM fell. Autolec was hampered by both rising expenses and a meagre 10 per cent increase in sales.
The sales income for the 26 other companies rose by 5.1 per cent. While the OP rose marginally by 0.2 per cent, the OPM fell to 14.5 per cent (15.2 per cent). Due to a 26.6 per cent rise in the interest burden, the GP slipped by 8.6 per cent and the GPM to 9.9 per cent (11.4 per cent).
In recent years, the auto ancillary industry has been hard-pressed to match its phenomenal performance of 1994-95, when sales (for 49 companies) grew by 39.1 per cent, the OP by 44.7 per cent, GP by 57.7 per cent and NP, a massive 98 per cent. This growth continued, albeit at a slower pace, till the first half of 1996-97.
On an annualised basis, sales growth for 49 companies slipped to 20 per cent in 1996-97 from 29.7 per cent in 1995-96 mainly due to lower vehicle offtake. Take car sales, which grew just 16 per cent in 1996-97 compared to 32 per cent in 1995-96.
Naturally, the profit growth rate also slumped. OP grew by 26.8 per cent in 1996-97 over 30.2 per cent in 1995-96, GP by 23.3 per cent (33.8 per cent) and NP by 22.2 per cent (45.5 per cent). But by controlling input costs and with better inventory management, the 49 companies were able to maintain their profit margins.
Raw material costs as a percentage of sales fell marginally from 43.3 per cent in 1995-96 to 42.5 per cent in 1996-97. As for inventory, it rose by only 9.1 per cent to Rs 815 crore in 1996-97 compared to the 21.6 per cent growth in 1995-96. So the profit margins in 1996-97 were maintained. The OPM went up marginally from 14.6 per cent in 1995-96 to 15.5 per cent in 1996-97, GPM to 11.6 per cent (from 11.3 per cent) and NPM to 5.3 per cent (5.2 per cent).
The engine segment had a sales growth of 23.8 per cent in 1996-97. The OP rose by 21.4 per cent, GP by 17.6 per cent and NP by 15 per cent. While margins slipped for this segement, they were still higher than the other two segments. This is partly due to lower raw material expenses as a percentage of sales at 28.6 per cent compared to 42.8 per cent for gears and 49.3 per cent for other companies.
So the engine segment had an OPM of 21.1 per cent in 1996-97 (21.5 per cent), GPM of 17.2 per cent (18.1 per cent)and NPM of 5.8 per cent (over 6.2 per cent).
For the gear and other companies, profit margins improved marginally because of aftermarket demand. The OPM for the gear segment was 15.4 per cent (14.4 per cent), GPM, 11.1 per cent (10 per cent) and NPM, 5.5 per cent (4.4 per cent).
For the 33 other companies, sales role by 18.9 per cent in 1996-97. Their OPM was 12.8 per cent (11.5 per cent), GPM, 8.9 per cent (8.2 per cent) and the NPM, 5 per cent (4.8 per cent).
For now, though, recovery in the second half of fiscal 1998 is ruled out. With most commercial vehicle manufacturers holding excessive inventories, even if the demand picks up, the benefit will not be passed to component makers immediately.
Besides, there is the pressure of cheaper imports. For instance, import duty on gaskets came down from 25 per cent to 20 per cent in 1997-98. But the duty on raw materials for gaskets remained in the 25 and 40 per cent range. The challenge lies in overcoming the domestic slowdown by tapping the exports market. But that may take some time.