Staff Reporter | 01 Jul, 2008
Indian auto parts makers are fighting lower margins with their backs to the wall as input prices soar and the unexpected rate hike by the central bank adding more fuel to the inflation fire.

Companies are looking at new joint ventures, price increases and cost cuts amid flagging demand from automakers, themselves hurt by sluggish sales.

"It's going to be a difficult year as demand for vehicles is likely to fall further due to high inflation and interest rates," said Vaishali Jajoo, analyst with Angel Broking.

India's annual inflation rate jumped to 11.42% in mid-June, its highest in more than 13 years. The Reserve Bank of India (RBI) last week raised its key lending rate and cash reserve requirements for banks by 50 basis points each.

"I don't see the inflation pain easing over the next 3 - 6 months at least. Margins are definitely under pressure," said Santosh Singhi, Chief Financial Officer of Amtek Auto Ltd, one of India's top component makers.

MF Global auto analyst Ambrish Mishra said he expects net margins to fall by 150 to 200 basis points in the June and September quarters, year on year.

Profits have already been hit. Motherson Sumi Systems shares have shed 28% since January, and Jan-March profits fell to 41% from 82% last year.

Top auto and industrial battery maker Exide Industries' Jan-March profit rose year on year, but was below expectations. Exide shares have lost 14% since January, while Amtek Auto shed 42%.

Auto component manufacturers are finding it difficult to squeeze price increases from auto firms, themselves battling a slowdown in sales in 2007-2008.

The BSE Auto Index has fallen 34% in 2008, outpacing the the benchmark BSE index that fell 31.5% in the same time.

Overall vehicle sales for April-March shrunk by 4.7% to about 9.6 million units from the year ago period, data from the Society of Indian Automobile Manufacturers (SIAM) showed.

India's No.2 truck and bus maker Ashok Leyland's Chief Financial Officer K.Sridharan at a recent analysts conference said component suppliers had asked for price escalation and the company was still negotiating.

"Usually the first quarter is when contracts get renewed for most of the auto component makers," analyst Jajoo said.

In the dismal scenario, Rico Auto Ltd and Minda Industries are banking on JVs and just-completed expansions to kick in. Others are resorting to more unconventional ways.

Exide is buying smelter companies to recycle lead, which makes up 70% of its material cost. Tyremaker Ceat Ltd is relocating facilities outside high tax zones in Maharashtra.

Tractor and construction equipment maker, Escorts Ltd, in the midst of a restructuring exercise, has sold non-core assets to pare debt to save on interest.

"We have to keep at bay costs that will affect our business at large...we are reducing our costs of operations as well as material costs" Joint Managing Director Nikhil Nanda said.

Despite this, nobody is betting on any immediate respite.

"But the fact remains that you have high steel prices and increasing pressure from domestic markets. I don't see much relief for the auto ancillary industry for the next 6 months," MF Global's Mishra added.