ICRA RESEARCH SERVICES

Corporate Ratings
Anjan Deb Ghosh +91 22 3047 0006 aghosh@icraindia.com

Indian Auto Components Industry

EBITDA margins likely to stay upright in 2012-13 even as revenue growth may slow down

Contacts: Subrata Ray +91 22 3047 0027 subrata@icraindia.com Jitin Makkar +91 124 4545 368 jitinm@icraindia.com Ashish Modani +91 20 2556 1194 ashish.modani@icraindia.com K Srikumar +91 44 4596 4318 ksrikumar@icraindia.com

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TABLE OF CONTENTS
1. Overview.........3 2. Revenue growth drivers for auto component industry in 2011-12 and outlook for 2012-13 Auto component manufacturers whose revenue growth suffered in 2011-12.....5 Auto component manufacturers that maintained steady revenue growth in 2011-12 and reasons for the same...5 What will be the growth drivers for 2012-13? .........6 3. Quarterly trend in profit margins of auto OEMs and auto component manufacturers Trend in margins over last eight quarters....7 Interest coverage movement of auto component manufacturers.....8 Auto ancillaries that reported forex losses in 2011-12...8 4. Q4, 2011-12 performance of auto component manufacturers Asahi India Glass Limited........10 Banco Products (India) Limited.......12 Bharat Forge Limited.........14 Exide Industries Limited..........16 Gabriel India Limited.........18 Hinduja Foundries Limited.........20 Lumax Industries Limited........22 Mahindra Forgings Limited.....24 Motherson Sumi Systems Limited........26 Munjal Showa Limited.........28 Sona Koyo Steering Systems Limited .....30 Sundaram Clayton Limited........32 Sundram Fasteners Limited..........34 Wheels India Limited...........36 ZF Steering Gear (India) Limited...........38

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INDIAN AUTO COMPONENTS INDUSTRY

EBITDA margins likely to stay upright in 2012-13 even as revenue growth may slow down
JULY 2012 Overview
The year 2011-12 was a mlange of events and disparate outcomes for the constituent companies in the ~Rs. 1,600 billion Indian auto components industry. On one end of the spectrum were entities that experienced slowdown in their sales volumes and profit growth marred by lower supplies to domestic Original Equipment Manufacturers (OEMs), particularly in the passenger vehicle (PV) and the Medium & Heavy Commercial Vehicle (M&HCV) segments. On the other, were select entities that maintained a healthy revenue growth by virtue of steady growth in exports, inorganic growth pursuits, market share gains, replacement market leaning, non-automotive segment sales scale-up and dieselvehicles oriented product portfolio. If the year 2010-11 was characterized by strong demand but trailing capacity build-up, the year 2011-12 displayed the deleterious impact of both demand slowdown as well as supply shocks - consequent to the tsunami in Japan, labour strike at Maruti Suzuki and floods in Thailand - on the growth and profitability score card of a large number of auto component manufacturers. Apropos our sample of 36 listed auto component manufacturers, the QoQ revenue growth of these select entities was in low single digits during Q1, Q2 and Q3 of 2011-12 which too was aided largely by increase in average realization which in turn was induced by higher raw material costs. However, even as Q4, 2011-12 was marked by sequential improvement in revenue growth numbers of these select entities, the same still remained weaker on a seasonally-adjusted basis. Within our sample universe, however, there was a wide variance in the performance of individual companies with revenue growth being relatively higher for companies dependent on the domestic two-wheeler (2W) and Light Commercial Vehicle (LCV) segments; and growth being lower for companies dependent on the PV and M&HCV segments. This broadly mirrors the trend in sales volumes seen in the respective automobile segments in 2011-12 (Refer Table 1). Further, despite macro-economic challenges currently being faced by the automotive industry - PV and M&HCV segments in particular due to inflation, high interest rates and rising fuel prices, many of the auto component manufacturers reported strong double digit revenue growth in 2011-12 supported by (i) component exports to Europe and USA for CV applications (further supported by a favourable exchange rate scenario in the latter half of 2011-12); (ii) increased sales to the domestic replacement market; and (iii) rising share of revenues from the non-automotive segment. Also, several entities in our sample have been displaying significantly higher revenue growth than average over the last several quarters by virtue of their success in improving market share, expanding product portfolio and changing product mix in favour of higher realization components. The above features sailed such companies through in 2011-12, allowing them to report healthy topline growth, overall demand side pressures notwithstanding. Table 1: Trend in Sales Volumes of Automobiles (Domestic + Export) Sales Units (Nos.) 2007-08 2008-09 1,888,432 7% 200,406 -32% 226,389 -10% 8,441,793 5% 2009-10 2,395,922 27% 265,481 32% 310,921 37% 10,511,415 25% 2010-11 2,973,900 24% 352,060 33% 400,645 29% 13,329,895 27% Q1, 2011-12 724,134 9% 81,503 6% 111,082 25% 3,692,658 18% Q2, 2011-12 731,870 1% 92,710 6% 130,144 37% 3,922,111 19% Q3, 2011-12 721,793 0% 89,961 11% 132,710 27% 3,877,733 13% Q4, 2011-12 947,434 14% 112,444 6% 151,641 27% 3888,610 12% 2012-13E 5-7% 2-4% 10-12% 8-9% 2012-17E (CAGR) 10-11% 9.5-11.5% 11-13% 9-11%
The domestic automobile industry showed mixed performance in 2011-12 with the volume growth of 2W and LCV segments remaining steady, while that of the PV and M&HCV segments gearing down significantly compared to the previous two fiscals.

In the backdrop of an overall dull environment for auto sales in 2011-12, there were select auto ancillaries whose revenue growth stood out on the back of steady growth in exports, inorganic growth pursuits, market share gains, replacement market leaning, non-automotive segment sales scale-up and dieselvehicles oriented product portfolio.

PV 1,766,390 Growth (YoY) 12% M&HCV 293,094 Growth (YoY) 0% LCV 252,722 Growth (YoY) 13% 2W 8,068,447 -5% Growth (YoY) Source: SIAM, ICRAs Estimates

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While there was large variance in the performance of individual companies in terms of revenue growth, margin pressures were nondiscriminatory as rising raw material costs (adjusted for INR depreciation against USD), forex losses and higher interest burden added to the costs while intensifying competition restricted pricing power across all automobile segments. During the course of 2011-12, the EBITDA margin trajectory of auto industry participants was V-shaped with margins in Q1, 2011-12 and Q4, 2011-12 being broadly at par with the 2010-11 levels and margins dropping significantly during Q2, 2011-12 and Q3, 2011-12. Also, the net profits of entities with foreign currency loans suffered in Q2, 2011-12 and Q3, 2011-12 due to MTM losses on restatement of foreign currency loans following sharp appreciation of USD against INR since the second fortnight of September 2011. Key Sensitivities and Outlook: As per industry estimates, out of the total turnover of the Indian auto components industry, around 60% is derived from sales to domestic OEMs, around 25% comes from sales to the domestic replacement market and around 15% is derived from exports. Thus, domestic demand recovery/ sustenance will be the primary variable that will govern the automobile industrys revenue growth and profitability prospects over the short term. In terms of exports, while the prevailing weakness of INR Vs USD will not have any material impact on the industrys exports profitability at a broader level - given that exports account for only ~15% of the industrys total revenues - individual companies that do have meaningful exports dependence, should benefit from their enhanced exports competitiveness arising from the prevailing weakness of the Indian currency. The weakness in overall revenue growth of the auto components industry is likely to persist in 2012-13; yet, EBITDA margins may remain intact or even improve as companies step-up focus on cost control, besides benefitting from a benign raw material cost environment. Moreover, the industrys planned capex outlay for 2012-13 also remains conservative since a large magnitude of greenfield and brownfield capacity expansion was concluded during the course of the last two years that provides sufficient capacity buffer to meet the level of demand envisaged over the short term.

The recent trend in downhill movement of global commodity prices is a positive; however, INR depreciation against USD may restrict the potential benefit to show up on EBITDA margins.

Over the short term, our outlook for the automobile industry remains somber. In 2012-13, we expect volume growth in the PV segment to be 5-7%, in the M&HCV segment to be 2-4%, in the LCV segment to be 10-12% and in the 2W segment to be 8-9%.

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