Festive season may push auto ancillary units' growth

With the festive season just around the corner, auto ancillary units are licking their lips in anticipation of higher sales after the June quarter witnessed a subdued volume growth.

The festive season normally witnesses launch of several car models and these are expected to push up volume growth of auto ancillaries. The growth of auto-ancillary industries is linked to the volume growth of key original equipment manufacturers (OEMs).

The revenue growth of the auto and auto ancillary units plummeted on subdued volume growth witnessed by major Indian OEMs during the quarter ended June 2007.

Higher costs of raw materials, however, continue to pressure EBITDA margins for some auto ancillary players while some others managed to improve through operational efficiencies, an ICICIdirect Research quarterly report on auto and auto ancillary by analyst Supriya Khedkar said.

Though exports are an attractive market for automobile and ancillary players, the appreciation of the rupee against the US dollar and Euro hit them hard, Khedkar said. The year started on a sluggish note as April-May are usually lean months for auto sales.

Volume growth further tapered off due to a rise in interest rates and higher fuel prices. Though higher interest rates did not have much of an impact on EMIs, with consumers also having the option of increasing the loan tenure, sentiment was badly hammered, Khedkar added. However, aggressive players like Maruti Udyog and Mahindra & Mahindra reported revenue growth of 25.8 per cent and 16.8 per cent respectively.

Further, launches help to create a brand image and also boost volume growth of both auto and auto ancillary units. It said the slowdown in tractor sales across the industry has not spared industry major, Escorts.

Net sales grew by a mere 7.7 per cent to Rs 515.5 crore in third quarter of FY 07. Poor performance of the tractor segment dampened revenue and profit growth. Going forward, analysts expect tractors' sales to pick up, expanding the company's top line.

The auto ancillary division of Escorts was the major laggard with revenues declining 33.3 per cent to Rs 19 crore. Higher operational and staff costs wilted EBITDA margins, which fell from 8.4 per cent to 3.4 per cent. However, repayment of high-cost debt resulted in a substantial decline in finance costs limiting de-growth in bottomline of Escorts, the report added.

The company also has an auto ancillary component unit, which contributes around 4-5 per cent to total revenues, but is running in losses. Escorts is expecting volume growth from this segment, the report stated.

Pune-based Bharat Forge (BFL) reported a 18.1 per cent growth in revenue during first quarter of FY 08, strongly backed by a 31.5 per cent growth in exports. Exports to Europe were a key growth driver and sales doubled to Rs 93.3 crore.

However, a slowdown in demand from the commercial vehicle segment in the US and an appreciation of the rupee against the dollar restricted revenue growth from the US to only 4.3 per cent, the report said.