Global PE firms eye India's auto components sector

Top private equity (PE) firms such as Temasek, Blackstone, Goldman Sachs, Samara Capital, and Baring Private Equity Asia are actively exploring investment opportunities in India’s auto parts manufacturing sector. These firms are convinced that India’s auto parts industry has long-term potential to provide to the local markets and overseas. Thus, companies are focusing on investing on the low market valuations of most of these auto parts vendors due to COVID-related uncertainties to purchase minority or controlling stakes. These firms are looking for makers of parts for internal combustion engine vehicles, and electric mobility.

According to some sources, the PE firms have approached some companies based in the automotive hubs of Chennai and Pune in the past few months.

The auto component manufacturers have been facing financial stress due to drastic decrease in vehicle sales since FY19, worsened by the lockdown since March-end. This situation has left promoters with an urgent need of funds to ramp up production and invest for the future but due to weak demand and depressed valuations, options have been limited. Banks and other financial institutions are also been careful of extending credit due to fear of loans turning bad. Some promoters are worried about taking on fresh debt, making PE investments a more viable option.

“The current fiscal will be a tough one for the auto sector since sales were down by almost 18 per cent last fiscal. Also, most promoters have invested heavily because of the upgrade to Bharat Stage VI norms. So, most of them will need partners who can guide them on investment and acquisitions in the long term as well as provide capital in the short and medium term," said the first person connected with deals.

According to a survey of the top 300 auto parts makers by ratings agency Crisil, combined revenues of the sector are likely to drop 16 per cent this fiscal due to the coronavirus-induced economic slowdown. EBITDA or earnings before interest, taxes, depreciation, and amortization of these companies is expected to drop 30-35 per cent in FY21.

“Possibly for the first time in over a decade, we are seeing demand from OEMs, exports and the aftermarket in the red this fiscal, in addition to demand slowdown for two consecutive years," said Mr Anuj Sethi, analyst, Crisil.

According to another source, promoters of auto component companies are also looking for opportunities outside India, especially in electric mobility, and the presence of a global PE investor on board is likely to help in arranging capital and other aspects of managing operations overseas.

“PE firms always look at the long-term potential and India is the only market expected to grow in the next decade as markets like China and US had already slowed before the pandemic. Most PE firms have also realized that current valuations make these companies quite lucrative and promoters also need capital. We expect consolidation in the component industry in the next two years," said another source.

Though, there has been no official announcement from any of the companies.