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Monday, May 24, 2010

Resurgent auto parts firms face valuation roadblocks

Valuations of Indian auto component firms have taken a beating, creating an environment where access to fresh capital is getting difficult, especially for new players waiting to tap the capital market. "We believe there is some level of over-capacity in the short term as there has been significant investment going into the sector the last couple of years," said Kumar Kandaswami, Senior Director, Deloitte India.
"Fresh investment must be sought for purposes other than just capacity expansion. Where companies do not have a strong story for seeking investments or making initial public offerings, they will find it difficult to get the right price." Endurance Technologies, which makes castings, shock absorbers and clutches and has plants in India, Germany and Italy, is expected to list its shares and provide an exit opportunity for its investors, including Standard Chartered Private Equity, which put in 1.5 billion rupees ($32 million) in 2006.

"We are raising various fund raising options and we will inform you after we have ascertained the appropriate course of action," Endurance spokesman Biswajit Choudhury told Reuters. "There's a bunch of companies going for IPOs," said Avendus Capital's Executive Director Preet Mohan Singh, adding that the high prices at which investments were made in these firms and the current low valuations would make exit opportunities difficult for their investors. "I don't see the institutional players on the equity side very interested in this sector. They've not made money because their entry valuations have been very high," he said. Others waiting for a listing are Varroc Engineering, a large supplier to two-wheeler maker Bajaj Auto , and Sandhar Locking Devices in which U.K.-based private equity firm Actis has invested.

LOW PROFIT, LOWER VALUATION

After a scorching pace of growth early in the decade, the automobile sector hit a speedbreaker in mid-2008 when the global credit crises led to a slowdown in the economy, while rising interest rates and lack of funds squeezed demand. The $20-billion auto components sector, which has global auto firms as their clients overseas, saw export revenues suddenly dip as US automotive giants plunged into a vortex of bankruptcies and plummeting sales. "The profit levels have been low and the returns coming down over the last couple of years," said Deloitte India's Kandaswami. Inefficiency in supply chains, underperformance of shares of auto parts firm compared to the main index in the last two years and not enough technology infusion have all contributed to the lower valuation in the sector, he added.

GREEN LIGHT AHEAD

However, the situation is not totally bleak. "Anecdotally, one understands the sector is making its supply chain more efficient. This should make the sector more interesting to investors," said Deloitte's Kandaswami. Some level of interest is returning, albeit slowly, from private equity firms and institutional investors, as signs of revival in the capital markets and renewed demand in the auto sector, holds out prospects of growth. Bharat Forge, India's top forgings maker, last month raised $134 million by selling shares, warrants and debt, and Exide Industries raised around $116 million in March through a share sale. "From an investment point of view the auto components sector looks positive in the long term because companies are posting good results," said V.S.R. Sastry of First Call India Equity. He added that it would progressively become easy for auto parts players to launch initial public offerings and raise capital to fund their business plans.

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