India’s leading auto component makers are betting on a continued surge in car sales. Driven by strong demand from original equipment manufacturers (OEMs) and healthy utilization of existing capacity, most firms have lined up sizeable expansion plans.
Credit rating agency Icra Ltd said in a recent report that there are about ₹ 10,500 crore worth investments committed over the last six to eight months. This excludes tyres and batteries companies and includes segments such as forgings, engineering, lighting and interiors. In comparison, there hardly any announcements on capex in the last couple of years.
Surprisingly, the noise about a shift away from the internal combustion engine platform to electric vehicles has not deterred investments in the former.
However, the sudden rise in investments has raised some questions among some investors. Would the current rise in demand sustain to back these capacity expansions? After all, gleaning from the past, there have been times when capacity additions during the peak of a cycle have been followed by a downturn in demand.
Be that as it may, this time round, the industry and analysts appear to be on the same page in forecasting growth. There is general belief that domestic vehicle sales will grow in double digits, on the back of three consecutive good monsoons and the consequent rural demand, infrastructure growth and the need for last mile connectivity. Besides, component makers are fairly well-placed financially.
Leaving aside tyre manufacturers, most firms are hardly leveraged. Icra’s sample of 48 component firms showed an average interest cover of 11.5, indicating that Ebitda is at a comfortable eleven-and-a-half times the interest cost. Ebitda (Earnings before interest, tax, depreciation and amortization) margin has inched up in spite of the steep rise in input costs during FY2018. The firms were helped by economies of scale, thanks to an increase in sales volumes. However, some segments such as tyres are bearing the brunt of high debt used to fund expansions and rising input costs, following the rise in crude prices. This is mirrored in the drop in their stock prices in the last few months.