How The Auto Slump Hurt Suppliers
The prolonged slump in sales of automobiles since the festive season last year has affected the firms that supply parts ranging from paints and tyres to lighting equipment.
Sales of cars and two-wheelers fell due to higher insurance and fuel costs and lack of easy availability of financing triggered by a crisis in non-bank lenders. So acute has been the slump that, according to Society of Indian Automobile Manufacturers, passenger vehicles sales declined to an eight-year low in April.
Here’s how the suppliers to auto companies have been affected:
Auto Ancillary Companies
Auto ancillary companies, which supply parts needed to manufacture cars or two-wheelers, have been the most obvious victims of the slowdown.
For instance, shares of India’s largest automaker Maruti Suzuki India Ltd.—which sources components from 38 domestic and international suppliers according to Bloomberg—declined by nearly 16 percent in the last 12 months. In the same period, stocks of its key suppliers mirrored the trend.
Lumax Industries Ltd., which makes auto lighting equipment and earns over a quarter of its revenue from the automaker, fell by 38 percent.The component maker Jay Bharat Maruti Ltd., which derives 83 percent of its revenue from Maruti Suzuki, declined 47 percent. PPAP Automotive Ltd., which makes automotive sealing systems, and derives around half of its revenue from Maruti Suzuki, dropped 48 percent.
The automotive industry is facing short-term demand challenges due to a general slowdown in the economy, Ajay Kumar Jain, chairman and managing director, PPAP Automotive, told BloombergQuint. “Due to low demand for vehicles, the company’s performance was also impacted,” he said. The sooner the economic buoyancy returns, the faster company’s performance is expected to improve, Jain said.
Companies with exposure to the commercial vehicle segment, including Jamna Auto and Bharat Forge Ltd., are facing a similar situation. Shares of the two companies have declined by over 9 percent and 6 percent, respectively, so far this year.
Bharat Forge’s Chairman Baba Kalyani had admitted as much to BloombergQuint in an interview. “The large slowdown in the first half of FY20 would be largely attributable to destocking of inventories by our customers,” he had said. “However, in the second half for the domestic market, BSVI-led pre-buying in commercial vehicles would lead to growth for us.”
The HM Bharuka-led Kansai Nerolac Paints Ltd.—which derived over half of its Rs 5,985-crore revenue from its industrial paints segment in FY19—was impacted the most due to the slowdown. The segment also comprises paints/coating products for consumer durables and engineering verticals. Some of the customers of the paintmaker—shares of which have declined nearly 22 percent so far this year—include Maruti Suzuki, Toyota Kirloskar Motor Pvt. Ltd., Suzuki India, Volvo Group India Pvt. Ltd., among others.
However, the outlook looks dim as the company expects subdued demand in the first half of the new financial year. This, according to JPMorgan, will restrict its ability to hike prices of its products, affecting its gross margin as prices of crude oil—a key raw material—have jumped 27 percent in the first three months of 2019.
Overall volumes of Apollo Tyres Ltd., India’s largest commercial vehicle tyre maker, grew 20 percent year-on-year in the quarter ended March due to weak demand from original equipment makers, according to exchange filings. The segment contributes nearly a third to the tyre maker’s sales. A similar situation holds good for JK Tyre & Industries Ltd. and CEAT Ltd.
However, Apollo Tyres looks to achieve double-digit volume growth in FY20 due to sustained replacement demand and pickup in growth from the second half of the fiscal. CEAT, however, only predicted high single-digit volume growth for the domestic tyre industry in FY20. Shares of Apollo Tyres and CEAT fell nearly 17.6 percent and 20 percent year-to-date, respectively.
Changes in emissions regulations, along with slowing demand, compounded auto bearing maker Schaeffler India Ltd.’s woes, which derives 35 percent of its revenue from the automobile segment.
The company said production cuts announced by major original equipment makers, or automakers, have led to inventory pile-up. It also expects sales to be hit by 2-3 percent after companies like Maruti Suzuki and Tata Motors Ltd.—shares of which have returned gains of -5 percent and 4.86 percent so far this year, respectively—announced that they would halt production of diesel cars. Edelweiss said as much in a recent report.
Slowing auto sales also led to 13 percent decline in sales of Bosch Ltd., which makes auto parts and accessories, in the quarter ended March. Oliver Roehrl, the company’s chief technical officer and director, told BloombergQuint that higher inventory impacted growth in the fourth quarter. The company, he said, is focusing on issues related to compliance with BSVI emissions norms with its key customers.
Shares of Bosch and Schaeffler India have returned year-to-date gains of -12 percent and -13 percent, respectively.