Mazars survey 2011: Indian automotive industry all set to grow at 20%

Through a first of its kind survey based report covering all the verticals within the automotive sector in India, Mazars reached out to over 300 companies to obtain and analyse their perspectives on various aspects such as growth, profitability, M&A, structural changes, technology, consumer and workforce trends - aspects which are transforming this industry in India.

“The Indian automotive industry has been an engine of growth for the Indian economy and has well demonstrated its catalytic ability by producing a variety of world class vehicles. Mazars has analysed some pertinent developments in the Indian automotive industry while providing a perspective on various aspects which are transforming the industry”, said Mr. Viraf Mehta, Mazars India.

“Some of the important trends driving the overall growth of the automotive industry are good GDP growth, higher consumer confidence, increased spending on infrastructure and thrust on rural employment. We see the momentum continuing in the coming years”, said Bharat Dhawan, Mazars India.“The next big transformation could be the shifting of innovation in terms of research and development centers of excellence, to India, as the market grows in importance”, says Monish Chatrath, Mazars India.

The automotive industry in India responded quickly and decisively to the global meltdown with several companies cutting down production targets and reducing off takes, while also focusing on the order lead time and going back to their vendors to renegotiate prices. 34% of the respondents renegotiated vendor prices to cut costs during the slow down. Many of the vendors also compromised on the prices to maintain their customers.

Unlike several developed economies (USA and the European countries) which witnessed large scale shutdowns, only 13% of the respondents actually downsized their staff in their respective organizations.

Commenting on the impact of recession in the Indian automotive Industry, Monish Chatrath, Mazars India said, the last three years have been dramatic for the automotive sector worldwide. While the manufacturers in India did not have to go through closures and sell outs that we saw in some of the most developed economies, it is true they were under severe pressure to maintain a respectable bottom line and the growth that was being taken for granted did not seem to be certain any more.

With the resurgence of the economy and the rising income levels that have triggered a good growth in car sales several car manufacturers have benefited from this trend. The current scenario is witnessing a robust growth in car sales, after the relatively moderate growth last year, especially in markets like Chennai, Delhi, Mumbai, Chandigarh, Ahmedabad, Bangalore and Pune. With the revival of market, these markets are showing strong resilience. In what could be termed as a very placid market in 2008-09, has now staged a strong comeback. 53% of the respondents feel that there will be a positive growth in the order book size this year when compared to last year and this expectation holds good for the automotive Original Equipment Manufacturers (OEMs) and auto component manufacturers.

Almost 35% of the respondents believe that the increase in their revenue growth in the following year will be due to an increase in the market demand driven by enhanced level of vehicle penetration, and greater disposable incomes. At the same time, most of the respondents were not so optimistic about a rise in exports as only 18% of the respondents felt that exports will lead to growth in the following years.

Emerging markets have yet to translate themselves into completed deals. Cash-strapped overseas strategic buyers have, in this difficult period, remained focused on survival, while private equity firms also remain on the sidelines, unwilling to commit its capital without debt financing.

There has been an improvement in M&A activity in the current year compared with the previous year. Automotive companies, the ones that are most likely to leverage M&As are those that have stronger operating models and cash positions. Several respondents have also expressed their need to develop a competitive advantage through consolidation of scale and expertise.

52% respondents are optimistic of expansion plans in the next three years. Indian companies are now aggressively looking at European, North American, markets and Asia to spread their wings and become global players in this sector.

The report indicates that the Indian auto sector is still relatively optimistic about its growth plans and prefers to rely on internal accruals for deals with 60% of them plan to use existing cash reserves whilst the remaining plan to take the route funded partly by private equity funds and financial institutions. Engendered in this sentiment is a recouping of M&A activity with supportive financing conditions and a return of confidence to the board room post the economic slowdown.

While there are several growth opportunities at the same time, the Indian automotive industry presents challenges for all players. About 29% of the respondents feel that the biggest impediment for growth of the sector is inadequate infrastructure facility in the country. Also, increase in competition from imported products mostly in the ancillary and parts and pricing pressures from the customers were considered as far reaching challenges by about one third of the respondents.

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