Auto parts shares seen up on boom

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GMI

Thursday, 17 February , 2005

Bombay: Booming vehicle sales and outsourcing by foreign firms are expected to lift shares in India's auto parts companies by as much as 40 percent in the fiscal year starting in April, analysts said.

Sales of passenger vehicles -- cars, vans and utility vehicles -- in India have jumped 22 percent in the first 10 months of this fiscal year, while truck and bus sales grew 28 percent and motorbikes and scooters climbed 17 percent.

That growth is expected to accelerate as rising middle-class incomes and cheap credit in Asia's fourth-largest economy spur demand in a country where only eight of each 1,000 people own cars.

Exports have also been growing at nearly 30 percent annually as foreign companies shift production of auto parts to low-cost countries such as India and China. Analysts say that trend should continue even though rising steel and rubber prices could squeeze margins.

"I think growth is going to be driven by a combination of domestic and export demand ... and there is great possibility of increasing scales in the export business," said Jigar Shah, head of research at brokerage K.R. Choksey Shares & Securities.

Shares of leading auto parts companies have jumped 65 percent on average in the current financial year, and despite high price earnings multiples of 14-20 on forecast full-year earnings, the outlook was bright, analysts said.

"The relatively high PE multiples reflect high expected future industry growth," said Shah, who predicted shares to rise up to 40 percent over the next 12 months.

Shares in Bharat Forge Ltd., the world's second-biggest forging company, have soared 85 percent since April 1, while those of India's biggest auto parts company, Motor Industries Co. Ltd., have jumped 34 percent.

By comparison, the main Bombay index has gained 18 percent over the same period.

Amitabh Chakravarthy, head of research at the portfolio division of Kotak Securities, said he expected shares of the top companies would rise 40 percent in the coming fiscal year on the back of earnings growth of 25-30 percent.

TOP PICKS

Shah said his top picks included leading nuts-and-bolts maker Sundram Fasteners Ltd., fuel-injection equipment maker MICO, auto-electricals firm Denso India and bearings maker SKF India.

Parts firms that supply a large share of a vehicle maker's purchases will have a greater ability to pass on cost increases from rising raw material prices, analysts said.

"Companies must have some export orientation and an ability to pass on cost increases to vehicle firms," said Chakravarthy, whose picks included auto-lamps maker Lumax Industries, Automotive Axles and hydraulic equipment firm Dynamatic Technologies.

India's Automotive Component Manufacturers Association estimates auto parts output grew 17 percent in the past three years to March 2004, while exports jumped 27 percent to $1.0 billion as global vehicle makers sought India's low-cost, high quality auto parts to beat competition in their home markets.

But India still ships just a fraction of the level exported by the world's top parts makers. Mexico, Canada and Japan are the world's three biggest car parts exporters, each shipping between $25 billion and $35 billion worth a year.

Even within Asia, India faces tough competition, ranking below Japan, South Korea, China and Taiwan in the value of automotive parts exported, according to figures collected by Reuters.

But India is on the rise. Production in the first eight months of this fiscal year is estimated to have risen 25 percent and exports by 40 percent.

Last year, Toyota Motor Corp., opened a factory in south India to make gearboxes for utility vehicles that will be assembled in South America, South Africa and Asia.

Supplying a crucial part to the world's second-largest car maker represents a major landmark for Indian manufacturing.

India's auto parts industry has the potential to expand fivefold by 2015 to between $33 billion and $40 billion from $6.7 billion in 2003/04 by exploiting its low-cost production capabilities, global consulting firm McKinsey & Co. said.

There are more than 400 small and medium sized auto parts firms in India that feed the country's $15 billion vehicles industry that includes cars, trucks, bikes and tractors.