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The Rs.

120 billion (bn) auto ancillary industry is fragmented with over 5,000 players manufacturing several
components across different product segments with each product segment having around three to five key
players. The industry comprises the organized sector and the unorganised sector of which the former
comprises around 300 medium and large-sized units accounting for 75% of the industrys turnover. The
unorganized sector in contrast comprises over 5,000 small-scale units concentrating mainly on low value-
added segments of the industry and catering to the replacement market. Their competitiveness stems from
lower pricing, enabled by lower operating costs and exemption from excise duty.

The automotive industry in India is one of the largest in the world with an annual production of 23.96
million vehicles in FY 2015-16, following a growth of 2.57 per cent over the last year. The automobile
industry accounts for 7.1 per cent of the country's gross domestic product (GDP). The Two Wheelers
segment, with 81 per cent market share, is the leader of the Indian Automobile market, owing to a growing
middle class and a young population.
Indian auto component industry is one of the fastest growing industries and is riding on the success of the
automobile sector. Coupled with growing demand and technological advancements, the auto component
industry in India has emerged as a key market in Asia as well as in the world. Revenues have risen from
USD26.5 billion in FY08 to USD 66 billion in FY 16Ea CAGR of 12 percent between FY 08-16
The country currently supplies auto components to a number of international automobile makers, such as
General Motors, Toyota, Ford and Volkswagen, amongst others.
Market segmentation
The auto ancillary industry can be broadly classified on a functional basis into engine parts, transmission and
steering parts, suspension and braking components, electrical equipment and others. The engine parts segment is the
most significant contributor to the ancillary industry in terms of value and accounts for around one-third of total
production.

The market for auto ancillaries is classified into original equipment (OE) market, the replacement market and exports:-

1. Original Equipment Manufacturers (OEM) market: The OEM market for auto ancillaries is characterised
by cyclicality in line with the end-user automobile industry. The component manufacturers commission
capacities and undertake production in line with the production schedules of the Vehicle Manufacturers
(VMs). Servicing the OEM market requires access to technology necessary to meet quality requirements,
ability to meet the stringent delivery schedules of the VMs, price competitiveness and in some cases proximity
to VMs.

2. Replacement Market: The size of the replacement market in India is significant owing primarily to the
large vehicle base approximating 40 million vehicles. The low vehicle scrap page rate in the country, also
necessitate frequent replacement of parts. The replacement market acts as a steadying factor in the industry,
and provides a partial hedge against the risk of recession in the auto sector. The component manufacturers
enjoy better bargaining power in the replacement market as compared to the OE market and as a result, the
margins in the replacement market are higher.

3. Export Market: The domestic industrys focus on exports has been recent and has been part of industry
initiatives to counter the cyclicality in the domestic auto sector. During the period between 1993-94 and 1997-
98, Indias ancillary exports have grown at a CAGR of 19.3% to touch Rs. 12.3 bn. Growth in the export
market is however constrained by poor price-competitiveness on account of the domestic industrys
uneconomic size of operations, higher defect rates of Indian products, high investments required to be made in
warehousing facilities and inadequate technological development. A significant portion of the industrys total
exports is to the overseas replacement markets and the domestic component manufacturers have limited
exposure to the global OEMs.

Leading players in the industry

Leading players in the Auto Ancillary are listed according to their individuals sales out
of the total sales in the industry i.e. their market share. Total sale registered year ended
2016 is Rs.49,581.82 cr and are as follows :-

1. BOSCH CHASSIS :- Established in 1985, Bosch Chassis Systems India Limited is a


subsidiary of the Bosch Group in India. The Bosch Group holds a stake of 98% in the
company. Business areas include actuation and modulation of the Braking System. The
company manufactures products to comply with the stringent requirements of the
leading OEMs in the automobile industry as a manufacturer of brakes for 3-wheelers,
Passenger Cars, Utility Vehicles, and Light Commercial Vehicles. RBIC uses its system
engineering capabilities to suggest the right kind of brake system for the OEMs.
Company registered year end 2015 sale of Rs.969.41cr with market share of 1.96%. It
registered a operating profit margin of 3.82%.

2. Endurance Tech :- Endurance Tech is the complete solutions provider, providing end-
to-end services by engaging its customers from conception to end-user delivery.
Company's development process includes design, development, validation, testing,
manufacturing, delivery and aftermarket sale service for a wide range of technology-
intensive auto component products. Company registered year end 2016 sale of
Rs.3673.91 cr with market share of 7.41%. It registered a operating profit margin of
10.89% and Net Profit of Rs.205.60 cr.

3. Motherson Sumi Sys :- Motherson Sumi Systems Limited (MSSL), the flagship
company of the Samvardhana Motherson Group was established in 1986 in joint
partnership with Sumitomo Wiring Systems , Japan. MSSL including its subsidiaries and
JVs is one of the leading manufacturer of automotive wiring harnesses, mirrors for
passenger cars and a leading supplier of plastic components and modules to the
automotive industry. Company registered year end 2016 sale of Rs.5312 cr with market
share of 10.71%. It registered a operating profit margin of 16.27% and Net Profit of
Rs.711.90 cr.

4. Munjal Showa :- Munjal Showa Limited in its joint venture with Showa Corporation,
designs and manufacturers shock absorbers and struts for leading two-wheelers and
four-wheelers. Company registered year end 2016 sale of Rs.1501.84 cr with market
share of 3.03%. It registered a operating profit margin of 6.87% and Net Profit of
Rs.61.15 cr

5. WABCO India :- WABCO India designs, manufactures and markets conventional


braking products, advanced braking systems, and other related air assisted products
and systems. Company registered year end 2016 sale of Rs.1838.27 cr with market
share of 3.71%. It registered a operating profit margin of 14.61 % and Net Profit of
Rs.204.62 cr.

6. Wheels India :- Wheels India is one of the largest steel wheel manufacturers in the
world. The company caters to coming from Cars/ UVs, Commercial vehicles, Tractors,
Single Piece wheels and Construction & Earth Mover wheels. The company also
manufactures air suspension kits for trucks and buses. Company registered year end
2016 sale of Rs.2016.27 cr with market share of 4.07%. It registered a operating profit
margin of 7.32% and Net Profit of Rs.39.99 cr.

Trends and developments

The domestic automotive industry was traditionally characterized by high import tariffs and
quantitative restrictions on imports. Which led to high level of indigenization of vehicles built
in India. The limited range of vehicles available in the market , the relative long life vehicles,
the well-defined and demarcated end-user markets across OEM clients, together with high
levels of vertical integration of domestic vehicles manufacturers limited the growth of the
domestic auto ancillary industry and the licensing policy of the government also acted as an
entry barrier and effectively prevented competition resulting in inefficient manufacturing
systems.

The entry of Maruti Udyog limited (MUL) in 1983 initiated a new phase of development in the
industry and led to large volumes and quantum improvements in quality and infusion of new
technology .MUL encouraged the establishment of joint ventures with Suzukis Japanese
suppliers. The establishment of several manufacturing units provided a further impetus for
growth to auto-components industry and an overall increase in competition levels in the
industry followed by the entry of major VMs including General Motors, Ford, Honda, Hyundai,
Daewoo and fiat marked the second phase of development in the industry. The Governments
insistence on indigenization norms provide the domestic auto ancillary industry lead time to
develop the capabilities required to service the sophisticated end product requirements.

The period of 1993-94 and 1996-97 led to large capacity additions in the auto ancillary
industry. The subsequent 1997-97 and 1998-99 have been characterized by the slowdown in
the commercial vehicles(CVs) and passenger car segments of the auto sector resulting into
over-capacity situation in the components market. The production in the ancillary industry
registered a CAGR of 31% during the period between 1993-94 and 1996-97, growth in the
industry slowed down to 6% during the period between 1996-97 and 1998-99. Consequently,
increasing intensity of competition and decline in the pricing flexibility of players led to fall in
the profitability of component manufacturers. However, the eleven-month period between
April 1999- February 2000 has witnessed a significant recovery in the CVs and passenger car
segments of the auto sector leading to an upturn in the components industry. Indian Auto
component Industry registered a tremendous CAGR of 14% during FY 2006-16.

Recent trends
1. Declining integration levels of VMs: To improve their cost-competitiveness (lower fixed
costs), the large VMs in Indian are reducing their levels of integration by hiving-off certain
component divisions into separate companies. Due to outsourcing by VMs the need for
investment and technical upgradation is transferred from VM to auto ancillary manufacturer.

2. Adoption of global logistics and supplier systems: The Indian auto ancillary industry is
currently witnessing the emergence of single-source supplier systems which require the
component manufacturers to significant investments in dedicated facilities, such as design,
tooling and production for the manufacture and delivery of the required components. Driven
by the need to be cost effective, competition levels and declining pricing flexibility auto
manufacturers are resorting to implementation of inventory management techniques, such as
Just-In-Time which has resulted in the working capital requirements of component
manufacturers.

3. Increasing emphasis on quality: The entry of global vehicle manufacturers in the domestic
market is leading to adoption of global quality control practices in the domestic industry.
SELF-CERTIFICATION is emerging concept in the industry, which obviates the need for
quality check to be undertaken by the vehicle manufacturer as components are delivered
directly to OE clients in a ready-to-use quality certified form.

4. Declining Pricing Flexibility: As the auto ancillary industry is characterised by derived


demand, pricing flexibility in the industry is constrained by the pricing pressures on the end-
user auto sector.

5. Technological Changes and Impact on profitability- It has lead to significant investments


in the design and tooling capabilities of component manufacturers and has lead to increase in
the number of variants has the effect of reducing the batch size .

6. Tierisation: Tier 1 manufacturer outsources sub-assemblies from various Tier 2 players and
assembles entire system modules to be used as inputs by the VM.

Financial performance of the industry


Ratio:-
Description 2016 2015 2014 2013 2012
Margin Ratios
EBITDA Margin(%) 12.36 12.09 11.15 11.74 12.03
EBIT Margin(%) 7.36 8.07 7.14 8.38 9.2
Pre Tax Margin(%) 4.77 5.34 4.31 5.62 6.61
Performance
Ratios
ROA(%) 3.75 4.32 3.16 5.14 6.76
ROE(%) 9.17 10.99 8 12.85 17.11
ROCE(%) 11.55 13.46 11.61 14.64 17.52
Efficiency Ratios
Receivable days 52.21 48.99 51.61 50.33 45.64
Inventory Days 41.95 37.87 39.85 39.76 37.79
Payable days 54.13 50.98 53.93 54.61 53.94
Financial Stability
Ratios
Total Debt/Equity(%) 0.76 0.86 0.87 0.85 0.74
Current Ratio(x) 1.09 1.15 1.06 1.11 1.17
Quick Ratio(x) 0.75 0.8 0.75 0.76 0.81
Interest Cover(x) 2.84 2.96 2.52 3.04 3.56

Margin ratio-The industry registered EBITDA of more than 10% in the last five years
maximum 12.36% in the year ended 2016 this shows that the operating profit has
been good over the years . The industry registered operating profit margin (operating
profit as a percentage of net sales) of 7.36 % in the year 2016 and is more than 7% in
the last five years .There is significant difference between the EBITDA and EBIT this
due to depreciation provided for the capital intensive machines used in the
manufacturing of auto components.

Pre-Tax margin of more than 4% over the five years indicate that after providing for
the interest on the debt there are sufficient funds left for the industry to be retained
as earnings. Auto component manufacturers have taken significant advantage, during
most part of FY16, from continuous fall in global commodity prices, mainly steel and
copper. Most of these benefits are likely to be passed on to the OE customers over the
next three to six months.

Performance ratios- The industry has performed really well over earning on an
average of 5% over the five years and more than 9% and 10% on equity and capital
employed respectively. This may be due to increasing demand for automobiles in the
last 5 years and heavy investments done by big MNCs in the India in developing the
raw material production centers in the country.

Financial/stability ratios:-

Debt to equity ratio of less than one over the years indicate that the company is less
dependent on lenders to finance for there capital requirements and it also indicates
that the players in the industry are employing there own funds to finance for there
capital requirements and thereby indicating less finance cost. Current ratio of the firm
is slightly higher than indicating that liquidity position is almost sound. This can be
attributed to the large amount of production that the companys have to do so as to
cater to the requirements VMs. Interest cover ratio of more than one indicates that the
industry is generating sufficient operating profit to service the interest on debt.
Demand drivers and growth prospects

Auto component industry is demand driven. The profitability of individual companies depends
on efficient production. Small companies can compete by specializing. While larger
companies, produce mainly a standard line of products, smaller companies are more likely to
adapt products for customers' special needs.

Due to growth in the automobile industry and new players coming into the market specially
the big MNCs due these reasons the demand for auto components remain high throughout the
year.

Factors that can be attributed to regular demand for auto components:-

1. Fastest growing major economy in the world with GDP growth rate of above 7%.
2. A growing working population and an expanding middle-class are expected to remain
key demand drivers.
3. The presence of a large pool of skilled and semi-skilled workforce and a strong
educational system.
4. Increased investments in R&D operations and laboratories, which are being set up to
conduct activities such as analysis, simulation and engineering animations.
5. Reduction in excise duties in the motor vehicles sector will spur demand for auto
components.
6. The growth of global Original Equipment Manufacturers (OEMs) sourcing from India and
the increased indigenisation of global OEMs is turning the country into a preferred
designing and manufacturing base.

The future of auto components seems to be fairly bright as GOI has permitted 100% Foreign
Direct Investment (FDI) under the automatic route in the auto components sector. Excise duty
on engine for xEV (hybrid electric vehicle) reduced from 12.5% to 6%.Basic customs duty on
aluminium oxide for use in the manufacture of Wash Coat, which is used in the manufacture of
catalytic converters reduced from 7.5% to 5%. Countervailing Duty of 6% introduced on
engine for xEV (hybrid electric vehicle) to maintain parity with excise duty rates.

Higher allocation to improve road infrastructure which will push the demand for automobiles
and components:

1. Allocation of USD 8.46 billion with additional USD 2.3 billion to be raised by NHAI
through bonds

2. Allocation under Pradhan Mantri Gram Sadak Yojana increased to USD 2.92 billion; plan
to connect remaining 65,000 eligible habitations by 2019

3. Total investment in the road sector, including PMGSY allocation, would be USD 14.92
billion

State Incentives:

1. Apart from the above, each state in India offers additional incentives for industrial
projects.
2. Incentives are in areas like subsidised land cost, relaxation in stamp duty exemption on
sale and lease of land, power tariff incentives, concessional rate of interest on loans,
investment subsidies, tax incentives, backward areas subsidies and special incentive
packages for mega projects

Export Incentives:
1. Export promotion capital goods (EPGG) scheme.

2. Duty remission scheme.

3. Merchandise Exports from India Scheme (MEIS)

Areas based Incentives:

Incentives for units in Special Economic Zones (SEZs) / National Investment &
Manufacturing Zones (NIMZs) as specified in respective Acts or setting up projects in special
areas like the North-east region, Jammu & Kashmir, Himachal Pradesh & Uttarakhand.

Profitability/attractiveness of the industry using the Porters model

Bargaining power of supplier


Bargaining power of the suppliers is low to medium as the industry is characterised into organised and
unorganised sectors comprising of many players in the market. Supplier are spread throughout the country.
As the Automobile manufacturers have started assembling products supplied by different auto components
manufacturers .Therefore it has become increasingly important for auto components suppliers to be able to
supply and manufacture in bulk. Auto components manufacturers must be able to deliver according to the
needs of the VMs so as to stay relevant in the market. Due to many players and competition has resulted into
reduced profit margin. Any increase in cost of inputs results into increase in the price of auto components
and further leading to increase in the cost of auto mobile thereby affecting the demand of Automobiles. No
threat of forward integration for the VMs.

BARRIERS TO ENTRY

Barriers to entry is medium as there are both small and big players in the market. Big players enjoy absolute
cost advantage due to large scale production leading to economies of scale .Players who are in the auto
component industry for many years enjoy efficient allocation of resources due to experience in production.
Tax holidays and Government incentives are there. Initial capital requirement is high especially if a auto
component player wants to supply to big VMs. Small players are there generally in unorganised sector and
in the replacement market.

DEGREE OF RIVALRY

A company is free to enter in market as there are more than 5,000 players into the market as industry.
Auto Component Industry registered a Compound Annual Growth Rate(CAGR) of 14% during 2006-16,
during the same period exports increased from USD 3.2 billion to USD 10.81 billion. Therefore the
competition in the industry is very high as every player tries to maximize its market. Brand identity is there
and the product is identified by its and the goodwill for eg. People prefer Exide batteries over batteries of
other brand.
THREAT OF SUBSTITUTES

Threat from substitute products remains low, as public transportation is underdeveloped even in most cities
Rapid growth in Indian economy has changed travel patterns and there people having there own transport
over using public transport.
Bargaining power of buyer

Bargaining power of the buyer is high as in the current scenario VMs expect standardised and quality
products from the auto component supplier and the purchaser can bargain with auto component supplier on
price and a product of particular quality. There is a threat of backward integration. Demand is also price
sensitive. As there are many players and each is sell his product more as result of this bargaining power of
the buyer is high.

Rating of the industry:-

1. Importance of the industry to the economy:- Size of the Indian Auto Component Industry is
around USD 39 billion (2015-16) and contributes 2.3% to Indias Gross Domestic Product (GDP). In
the last financial year, the auto component exports contributed 4% to Indias overall exports.
Therefore this industry is of great importance to. Economy
2. Impact of government specific regulations:- Contribution of Auto Component Industry in Indias
GDP will account to as much as 5% to 7% by 2026. Auto policy 2002- Automatic approval for 100%
foreign equity investment in auto components manufacturing facilities. Manufacturing and imports in
this sector are exempt from licensing and approvals.

3. Growth in market size-Indian Auto component Industry registered a CAGR of 14% during FY
2006-16. Exports of auto components grew at a CAGR of 14% to USD 10.8 billion in FY 2015-16
from USD 3 billion FY 2005-06. Net sales grew from Rs. 8500 cr in 2004 to Rs. 45000 cr in 2016.

4. Inputs : Availability & Affordability- There are more than 5000 players in
the industry .The industry consists of both the organized and unorganized sector
indicating availability of inputs. The inputs comprises of both branded
components that are costly and unbranded components manufactured by local
players.

5. Diversification of various user segments- The industry caters to big MNCs and also
to Domestic players and also high export potential.

6. Demand supply gap- Large number of players in the market catering to all segments.
Demand supply gap minimum due to increasing demand for automobiles in the market consequently
leading to increase in the demand for auto components.

7. Threat of substitutes- No threat.

8. Seasonality- Demand for auto components increases with increase in demand


for automobiles. As the demand for auto components is a derived demand there
it depends on the demand for automobile.

9. Industry profitability- Industry profitability is good as the industry has generated profit over the
years.

10. Industry level leverage- Industry level leverage is low as debt to equity ratio is ratio is less than one
i.e. the companies in the industry are relying less on debt.

11. Influence of parallel and unorganized market structure:- High due many
unorganised players in the market competing with original equipment
manufacturers(OEMs).
12. International competiveness:- There is international competiveness as many international players
are entering into the industry and giving tough competition to domestic auto components
manufacturers and forcing them to raise there standards. The government of India has permitted
100% Foreign Direct Investment (FDI) under the automatic route in the auto components sector,
subject to all the applicable regulations and laws.
S.N
o. Parameter Score
Importance of the industry to the
1 economy 7
Impact of industry specific
2 government regulations 8
3 Growth in market size 7
4 Inputs : Availability & Affordability 8
Diversification into various user
5 segments 7
6 Demand Supply Gap 8
7 Threat of substitutes 8
8 Cyclicality/Seasonality 6
9 Industry profitability 8
10 Industry level financial leverage 8
Influence of parallel and unorganised
11 market structure 6
12 International competitiveness 5

Total Score 86
% 71.66%
Rating Grade Low risk
Note: Score of 1 indicates highest risk; and 10 indicates
lowest risk

Conclusion

Auto components sector could gain momentum in the coming days and is likely to register decent
growth in the years to come. The rapidly globalising world is opening up newer avenues for the
transportation industry, especially while it makes a shift towards electric, electronic and hybrid cars,
which are deemed more efficient, safe and reliable modes of transportation. Over the next decade,
this will lead to newer verticals and opportunities for auto-component manufacturers, who would
need to adapt to the change via systematic research and development.

The outlook of the Auto component sector looks promising in coming years on the back of sales
growth in passenger vehicles and motorcycle segments. Growth in the auto component industry will
be higher than the underlying automotive industry growth, given the increasing localisation by
OEMs, higher component content per vehicle and rising exports from India. Government's special
focus on exports of auto components too will provide the sector ample of support in near-term future.