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Recommendation Date : 13-May-2010 Last Update Date : NA
Auto Components :

The auto sector is on a tear. Companies across various categories have been recording superb growth in their sales. A resilient economy, with growth still averaging at around 6% -7% is resulting in a continued demand for automobiles. As a natural consequence companies in the auto components sector whose fortunes depend directly on the auto sector are doing well too. This wasn’t the case some time back. With demand pressures both on the domestic as well as the international front these companies were forced to scale down their operations particularly because of a sudden withdrawal of orders confirmed hitherto. The result was a huge pile up of inventories which hurt their operational metrics badly. But, things are changing and demand is catching up faster than was expected. However, not all segments of the auto components industry are experiencing the full impact of this renewed demand as yet. Will this remain the same? We don’t think so. Demand is sure to come back to all the segments of the auto component industry very soon. Automobile manufacturers have already started facing the heat of a supply constraint for components. This will see most of the players utilizing their capacities to the fullest and thereby improving upon their overall performance metrics. In a scenario like this stability of margins is assured.

However Indian component manufacturers will have to address two major likely problems.  One, supplies from China which are likely to be price competitive and at the same time volume driven and two, a challenge on the capacity expansion front. This is probably due to a hangover of what has happened to the industry in the recent past. Having said this, there are certain critical equipments such as machining parts and specialized forgings and transmission equipments which are high precision engineering stuff and so are less likely to face much pressure and will also yield higher margins.

What will drive real growth for auto component manufacturers? We believe that a continuous upgradation of facilities which enables a good product mix of value added and traditional products along with a hike in overall capacity is what will see them acquire a niche for themselves not only on the domestic front but also in the international market. This scenario was expected to happen in the early part of the 20’s but somehow could not unfold the right way. The sector again slipped on its luck for the second time thanks to a delirious turn of events on the global economic front. We strongly believe that the sector is once again looking up and there is little chance of a failure this time around as players in the sector have already seen the worst possible scenario and are well capable of handling such uncertainties now.

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