Two-Wheeler Sales Skid After Government’s Currency Purge

At a time when one has to stand in queue for hours to withdraw cash from ATMs or a bank branch, and yet walk out with a maximum of Rs 2,000, purchasing a two-wheeler is likely to be low on the priority list.

Retail sales trends at two-wheeler dealerships across the National Capital Region (NCR) have shown a sharp decline since the demonetisation of Rs 500 and Rs 1,000 currency notes came into effect on the midnight of November 9. Authorised dealers of some of the biggest two-wheeler manufacturers such as Hero MotoCorp Ltd., Honda Motorcycle and Scooter India Pvt. Ltd., TVS Motor Company Ltd., Bajaj Auto Ltd., Eicher Motors Ltd.’s Royal Enfield, and the premium player, Harley-Davidson India had a similar story to tell.

"We used to sell 20 vehicles per day earlier, and since the demonetisation move, sales have fallen to 2-3 units per day. The footfalls for enquiry have also drastically dropped."
 - Rohit Gaur, General Manager, Jasodha Auto (an authorised dealership of Hero MotoCorp)

Typically, two-wheelers purchases, particularly in the commuter segment, are carried out through cash, and the temporary cash liquidity crunch seems to have had a drastic impact on the fortunes of dealers.

“It may be a good move in the long term, but for now sales have stopped. Close to 95 percent of our customers pay by cash, and only a handful use other means such as credit cards. With only Rs 2,400 in their hand, it is not surprising that they aren’t buying two-wheelers,” said a representative of a Honda Motorcycle dealership, who did not wish to be quoted.

Hero MotoCorp and Honda Motorcycle are the two largest two-wheeler manufacturers in India, and dealers of both companies said sales were down to one-fifth of what they were before November 8.

A TVS Motor dealer said he managed to sell only one vehicle in the first two days after demonetisation came into effect. His average daily volume was around 8-10 units per day before the government’s latest move to fight black money.
Segments above the commuter category fared only a little bit better.

"We have seen a drop in sales volumes, yes, but the number hasn’t been drastic. Against daily sales of around 3-4 units, the number has fallen to roughly 2-3 units a day."

Tapan Sharma, Dealer Principal, Aman Automobiles (an authorised dealership of Royal Enfield

He added though that the situation was much worse for after sales works such as repairs and servicing, and said the decline in that space was nearly 60 percent.

Things worsened again at the top of the pyramid. Harley-Davidson, a premium motorcycle manufacturer, has seen sales drop to almost zilch. “Sales have fallen to almost nothing over the past week. This month has been the worst in the year so far. The few customers that did turn up, brought with them bundles of notes of Rs 500 and Rs 1,000 denomination which we could not accept. The very few sales that we did manage to make were all via alternate sources of payment such as debit cards,” said a representative of a Harley-Davidson dealership in south Delhi.

"This sort of a fall was expected. With limited cash in the market, people’s priorities have changed…it is more about running the house now. This is expected to last for at least a quarter. November is expected to be weak in terms of sales, as also December."

- Abduj Majeed, Partner-Assurance, PricewaterhouseCoopers India

Typically, December is a slow month in terms of vehicle sales as buyers choose to wait for a month to get a vehicle which is manufactured in the new year. November, which is a festive month and usually sees high sales, has been hit this time around.

“It is likely that manufacturers would cut production. It is unlikely that they will pile up inventory with this being the end of the year. The situation is expected to improve only by February-March,” Majeed added.

The industry lobby group, Society of Indian Automobile Manufacturers (SIAM), also said it had expected a temporary fall in numbers. “We had expected this temporary fall, but things will improve soon,” said Sugato Sen, Deputy Director General, SIAM. Sen added that a downward revision in the sales forecast for the financial year has not been made yet.

Given the prevailing sentiment in the market, with the common man scrambling to arrange for funds for essential commodities, a substantial fall in November two-wheelers sales figure is almost a certainty.

(SOURCE : http://www.bloombergquint.com/business/2016/11/18/two-wheeler-sales-skid-after-governments-currency-purge)

Outlook for Indian auto components sector stable in 2012:Fitch

NEW DELHI: Ratings firm Fitch today assigned a stable outlook to the Indian auto components sector in 2012 and said it is expected to perform well on the back of demand from original equipment manufacturers for localised content.

"Indian auto suppliers' credit profiles would largely remain stable in 2012, underpinned by the increasing focus of original equipment manufacturers (OEMs) on localisation. The latter would also prevent any sharp drop in revenue growth," Fitch Ratings said in its report, '2012 Outlook: Indian Automotive Suppliers'.

The latest report comes a day after Fitch gave stable outlook to the Indian auto sector and forecast passenger vehicle sales volumes to grow by 3-5 per cent and the commercial vehicles (CVs) segment by 8-10 per cent during the year.

The report said the current depreciation of the Indian rupee is likely to benefit auto suppliers in two ways.

While it will increase the cost-competitiveness of exports and prompt OEMs to go for local sourcing of components, it also presents an opportunity for domestic firms as India is a net importer of auto components.

The rupee has depreciated by over 16 per cent against the US dollar so far during the current financial year.

According to Fitch, exposure to different segments of the domestic automotive industry will help diversified auto suppliers' insulate operating cash flows.

However, it warned that smaller companies catering to limited products or market segments are likely to be more affected until the macroeconomic situation improves.

"The focus on localisation by OEMs, in an attempt to curtail costs and diversify the geographical spread of suppliers, would drive the growth for auto supplies amid subdued auto sales," Fitch India Associate Director Pragya Bansal said.

Nevertheless, Fitch said for deriving benefits from localisation and rupee depreciation, component-makers would have to make significant investments in capacity and capability-building.

"The investment needs for capitalising on the opportunity seems very large in relation to the internal cash accruals of most of the suppliers, prompting the need for external sources of funds. This would drive up debt for most of the suppliers, though some part of this could also be funded by way of fresh equity," the report said.

Fitch also said bilateral and regional trade agreements being negotiated between many countries could potentially change international trade flows over the medium-to-long term.

"Such free trade agreements could hurt the Indian auto suppliers' export potential on one hand, while adding to the competitive intensity in the domestic market, though their impact would only be seen in the longer term," it said.

(Source : http://economictimes.indiatimes.com/news/news-by-industry/auto/auto-components/outlook-for-indian-auto-components-sector-stable-in-2012fitch/articleshow/11447525.cms)

Rico Auto: Preferred global OEM supplier?

Outside View by Luke Verghese

A multiproduct group

Rico Auto Industries' core values are Excellence, Commitment, Integrity, Teamwork and Entrepreneurship. This 28 year old Delhi headquartered company manufactures and supplies a broad range of high precision fully machined aluminium and ferrous components and assemblies to original equipment manufacturers across the globe. Its integrated services include design, development, tooling, casting, machining, assembly and R&D across its product lines. Its strategic relationships include tie ups with foreign companies for clutch systems, hydraulic brake systems, Oil and water pump systems, and Alloy wheels. Besides Rico Auto, the group includes subsidiaries and joint ventures totalling some 10 entities. According to the brief financial highlights, collectively the group achieved a net turnover of Rs 13.3 bn in 2010-11. However the parent alone contributed a turnover of Rs 10.2 bn to this total. A 50% joint venture FCC Rico Ltd accounted for another Rs 3.1 bn. The other siblings are basically non entities-with four of them yet to open their account on the operations side. The parent makes do with four manufacturing units to crank out its fare, including the newly inaugurated unit at Gujarat. A manufacturing unit each in Bangalore and Chennai are on the anvil.

The performance sheet

The performance sheet of the company for the last five years reveals in all probability in stark detail the pounding that component units have to endure just to keep their heads above water. They have little or no bargaining power with the mother units that they cater to, and further, they are locked into strict quality and price control norms, and delivery schedules. Fortunately, after long years of somnolescence, the government has now taken steps to ensure that they are at-least paid on time for the services that they render. This was the biggest bugbear hurting component units prior to government intervention.But even given the many concerns that such companies have to address, there appears to be no dearth of entrepreneurs to play the role of pied piper to the parent units.

The company's operational income shows an erratic pattern. Net revenues have oscillated over the last five years in a very uncertain manner. If the top-line performance was erratic, then the bottom-line underwent a tectonic shift of sorts. That is to say the profit before tax hit a high of Rs 370 m in 2006-07, and then careened to a low of Rs 28 m in 2008-09, before bouncing back to a record a figure of Rs 291 m in 2010-11. Given the resultant topsy turvy state of affairs on the cash flow front, the management must be having its hands more than full when budgeting for capital expenditure outlays. And for whatever reason it keeps germinating new subsidiaries and pumping dosh into the equity of existing siblings, simultaneously. In 2010-11 for example it pumped in Rs 343 m in additional capital into the equity of three group companies. The book value of its investments in its subsidiaries which are all privately held amounts to Rs 986 m. This excludes any loans that it has may have advanced to them. The loans and advances schedule does not mention separately any advances that the parent has given to the siblings, but the auditor's notes state that one of the subsidiaries has used the parent's non funded letters of credit to the extent of Rs 35 m. Further, the schedule showing the transactions between the parent and the group companies reveals that the interest bearing loans outstanding at year end by the group companies amounted to Rs 627 m. This amount should logically have been shown separately in the loans and advances schedule.

MInadequate long term capital funding

Why the management does not do a similar to the equity capital of the parent to reduce its debt burden and interest payout is a Rubik's cube puzzle. (Probably they have a very well reasoned argument for not doing so). One says this in conjunction to the fact that the management which holds a slice over 50% of the voting stock has gone to the extent of hawking 47% of their holding as part of security wall to avail of loans or some such. In their collective wisdom they obviously believe that holding on the controlling stake at any cost is more desirable than diluting their hold, or even increasing the floating stock which may follow after a further issue of capital or something. The company presently supports on paper a reserves and surplus of Rs 3.1 bn on a piggly wiggly paid up capital base of Rs 135 m. The paid up capital in the preceding year was Rs 129 m. That is to say there was a capital infusion of sorts by the promoters during the year. The paid up capital rose by Rs 84 m through the issue of equity shares of Rs 1 each at Rs 17.5 per share to a holding company called Kapsons Associates Investments Pvt. Ltd. (The name Kapsons is an acronym for the Kapurs who appear to be the promoter owners). But such niggardly largesse will not suffice given the considerable requirements of long term capital by the parent. And, debt at year end stands at a very healthy Rs 4.5 bn. This is an increase of 90% over the base year 2006-07, against a 49% rise in the gross block to Rs 8.9 bn over the comparable period.

The company is virtually scraping the bottom of the barrel on the profitability side of the operations front. The revenues that it generates are on account of sales affected to the domestic tariff area and on account of export sales. The exports sales of Rs 1.8 bn, which also include sales of Rs 1.5 bn to its US and UK subsidiaries, account for a little over 17% of gross sales. How profitable these export sales are will however not be known as the disclosure requirements are silent on this aspect. The unit price increase that it generates on sales appears to be inadequate. To its good fortune though, debtor's out-standings at year end is a mere 13% of sales. More importantly, there are no bad debts to be provided for on these out-standings.

The P&L account

The way the profit and loss account is presented, the company managed a profit of Rs 290 m after depreciation. This profit figure includes Other Income of Rs 402 m. In the preceding year the corresponding figures were Rs 50 m, and Rs 247 m respectively. That is to say, barring the other income factor, the company would have reported a loss after depreciation in either year. The other income schedule is in itself under represented in the P&L statement. Bank interest receipts of Rs 81 m (Rs 59 m previously) has been netted off against bank interest paid out during the year. Logically, this receipt should have been added to other income. This would have inflated other income for the year to Rs 484 m against Rs 306 m previously. But let that be, as it does not in any way alter the outcome. What should also be taken note of here is that one of the receipts that constitute 'other income' was manufactured for the benefit of the company, which is struggling to show a bottom-line inked in black. The company logged a profit of Rs 191 m on the sale of assets. During the year it sold assets with a historical book value of Rs 207 m for Rs 370 m realising this profit on sale. The catch here is that the assets sold included leased land held by the company worth Rs 90 m. This land was forced down the throat of its subsidiary KRP Auto Industries for Rs 203 m. This is merely a book entry transfer of resources in every manner of speaking, and does not constitute an act to be proud of.

The company was able to register an increase in rupee sales by 30% to Rs 10.6 bn, gross of excise duty. The revenues include sales of Rs 2.2 bn affected to four siblings, and also to one company in which the directors are interested, but which does not form a part of the group. The unit price realisation on such sales is not separately known. (The company in itself was able to eke out an 11% increase in the unit price realisation in rupee terms on what it bought and sold during the year). However, manufacturing expenses rose in tandem with the percentage increase in sales to Rs 5.7 bn. Thus it negated any benefits that could have accrued to the company from the biggest expense item on the revenue expenditure side of the equation. The parent also bought goods worth Rs 126 m from one sibling, and goods worth Rs 599 m from one company in which the directors are interested, but which does not form a part of the group. It is not known at what price these goods were then flogged in the market place, assuming that these goods were finished goods in the first place. Neither has the company shown where this purchase value has been debited in the P&L account. The sharpest increase in costs among the other biggies was recorded by employee handouts which rose 39% to Rs 1.2 bn. Matters were hardly helped when interest costs rose 26% to Rs 517 m. The interest debited to P&L account averaged around 11.5% on a rough basis, on the average of the borrowings for the two years. The rate of interest that the parent charges its siblings are not known, barring the fact that they are interest bearing.

The many add ons

The parent has an equity stake in 10 subsidiaries and or joint ventures. The book value of the investments adds up to Rs 986 m. Just one company, Continental Rico Hydraulic Brakes accounts for 50% of the total investment. The parent earned a dividend income of Rs 48 m on this account - though none of the siblings have declared any dividend for the current year. These dividends could have emanated from the JVs' though. But that is not a matter of any real pertinence, given the fact that the primary purpose of these siblings is to add to the group image. But the related party disclosures shows linkages with 17 companies including seven in which the directors are interested but do not form an immediate part of the group. The parent has furnished the financial summary vitals of seven siblings. Only three of the companies have anything to show for it, and they are big ticket items if you please.

At the top of the heap is Rico Auto Industries, USA, which posted a turnover of Rs 1 bn, but managed a pre-tax of only Rs 19 m. What is very interesting here is that this sibling is a mere post office of that of the parent. As stated earlier the parent sold goods worth Rs 989 m to this sibling which in turn sold the goods by adding a small mark-up. This also begets the question as to why a post office needs total assets of Rs 419 m. Next in line is the UK based offspring which rang up sales of Rs 501 m, but managed a pre-tax of only Rs 17 m. Ditto with this company too. It is also a post office of the parent. The parent sold goods worth Rs 488 m to it, and the sibling in turn flogged these goods. This company has total assets of Rs 157 m. The other company of significance is Rico Jinfei Wheels Ltd, which appears to be the China based sibling. This company registered a turnover of Rs 382 m, but was awash in red ink on the bottom-line front. The other four companies have yet to open their account.

Clearly then the siblings have a long way to go before they impact positively on the accounts of the parent is any substantial way. The parent's biggest investment by far as stated earlier is in Continental Rico Hydraulic Brakes, but since this is a 50% JV, no financials have been appended.

It is not enough for the management to make statements of intent which look catchy to the eye. It needs to be backed up by margins which justify its ability to make its intentions come true.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme

This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

(Source: http://www.equitymaster.com/outsideview/detail.asp?date=12/28/2011&story=2&title=Rico-Auto-Preferred-global-OEM-supplier)

Export players in for volatile times

SWETHA KANNAN
CHENNAI, DEC. 17:

Auto component player MM Forgings, which is driven largely by exports, believes it is in for uncertain times with pricing pressure and margin squeeze. However, “this industry is also a sunset industry in the West. So, there is scope for us to grow,” says Mr Vidyashankar Krishnan, Managing Director. The company is also keen to get its act together in the domestic market.

More from Mr Krishnan…

These are not the best of times for the auto industry. As a component supplier, how do you assess the situation?

One has to associate some amount of cyclicity with the auto industry. However, the extent of volatility seen now has never been seen earlier. We have never had recession like the previous one nor has it bounced back as sharply… on unsure turf, when the basics are being questioned again.

In the domestic market, it is just a question of inflation because of which we have high interest rates. There is also inflation on account of commodity prices. Food inflation is here to stay — this is directly linked to wage inflation. Wages have gone up by 30-40 per cent over the last 2-3 years in the auto industry, leading to attrition and labour shortage.

How have global market sentiments affected MM Forgings?

We export 65 per cent of what we make. Of the remaining, 20 per cent goes outside India through our domestic customers. So, we are more susceptible to the global uncertainty than a plain domestic player.

There are structural weaknesses in the Western economies and they will take some more time — 5-10 years - to stabilise. Export players are in for volatile times.

Having said this, we are a small organisation in global terms. This industry is ultimately a sunset industry in the West. So, there is lot of scope for us to grow. Yes, pricing may not be as comfortable as it was. Earlier, we were operating at 17-20 per cent EBITDA. Margins will now come under pressure.

Last few months, our order book has been decent. In fact, until September, we had an issue with keeping customers fed with parts. Globally, trucks did well. Cars too did not slow down. But things may change from January.

What is the impact of commodity price rise?

Steel price has hit the roof. But this is covered by customers; we can't survive bearing steel. The impact of steel and petro products price on margins is starting to show. Powder metallurgy products have increased; therefore cutting tools prices have gone up. Diesel too has increased, so transport has gone up. A lorry trip between Chennai and Trichy cost Rs 1,600 five years ago. Today it is Rs 8,000-9,000. Power also is affecting us — we are forced to buy from power trading platforms.

Despite being around for several years, you are still a small player at Rs 300 crore. What will it take to leap to the big league?

We will get to Rs 500 crore in 3-4 years. We can achieve that with our existing capacity in our forging plants in Chennai, Tiruchi and Madurai, which have a total peak capacity of 40,000 tonnes. (Last year, they produced 26,000 tonnes.) There are no plans for Greenfield for now.

We believe in growing organically. We are not concerned much about topline. But we have to grow carefully and solidly.

Overall, auto is 70 per cent of our business; passenger cars account for only 20 per cent. We want to get more into the passenger car market abroad and in India.

We are also looking to increase our domestic customer base. With demand abroad not growing higher and higher every day, we are diverting attention to the domestic market.

Keywords: MM Forgings, driven, exports, believes, in for, uncertain times, pricing pressure margin squeeze

(Source: http://www.thehindubusinessline.com/companies/article2723846.ece)

Weak Rupee hurting Auto-Comp firms

Published: Saturday, Dec 24, 2011, 10:30 IST 
By Yuga Chaudhari | Place: Mumbai | Agency: DNA

Rupee’s slide is impacting the profitability of the auto component industry as well. Auto part manufacturers that are heavily dependent on imports are feeling the heat as their margins start to shrink.

According to component suppliers, the year has been tough so far. The sluggish demand has already affected their order books and with the rupee depreciating, the going has got tougher.

According to the Automobile Components Manufacturers’ Association, the industry imports around 20% components. Also, rising interest rates and labour costs are putting profitability under strain.

“A lot of imports take place for components and materials. It is very critical to the business. With the rupee going down all of a sudden, it affects our cost and profitability. It is also difficult to hedge in an uncertain scenario like this,” said Srivats Ram, managing director, Wheels India Ltd.

Auto companies have already announced prices hikes from January onwards to offset the impact of rising import costs.

Despite the slowdown, the companies will go ahead and effect a hike of 2-3%.

“The import costs have gone up considerably. However, there is no immediate relief from manufacturers’ side. They ask to absorb the pressure as the demand scenario is bleak. We expect our Ebitda margins to get affected by a couple of percentage,” said Harish Sheth, chairman and managing director for Setco Automotive.Setco currently imports not more than 5-10% of its materials.

“Imports take away a huge procurement cost. An impact of 200 basis points on margins is a huge pressure on the company. We are still in a better position as we have a decent amount of exports,” he added.

Passenger vehicle sales declined 0.50% in April-November this year.

“If companies like Maruti Suzuki and M&M have been impacted due to currency fluctuations, then auto ancillary companies will see an impact on their margins as they have limited pricing power,” said Surjit Arora, analyst with Prabhudas Liladher.

“Import cost can be passed on. But impact of rising interest rates and inflation can’t be passed on. Also, there is negative sentiment in the market,” said Jayant Davar, managing director of Sandhar Locking Devices.

(Source: http://www.dnaindia.com/money/report_weak-rupee-hurting-autocomp-firms_1629545)