Indian Homeland Security News and Updates

Auto parts makers shift gears, focus on defence deals

Source: Economic Times

13 April 2009 MUMBAI: Most Indian auto component companies, who have idle capacity and are battling low-margins following the slowdown, are shifting part of their production facilities toward making products for the more lucrative aerospace and defence sectors.

Companies doing this shift in the production portfolio include large names such as Bharat Forge, Amtek Auto, Tata Automobile (a 100% subsidiary of Tata Motors), Lumax Auto, Mahindra Systech, the JBM group and Sundram Fasteners, which together account for more than half of the total revenue generated by the auto component industry.

The move is aimed primarily at improving margins, which have shrunk to about 5%, the lowest the sector has seen in the past eight years, according to persons familiar with the development. Compared to this, margins in the aerospace and defence sectors are pegged at more than 15%, prompting these companies to make the shift. Also, with auto sales slipping in the last few months, most auto component players have spare capacity.

The trend is significant as Indian auto component industry was till last year the fastest growing among most sectors with the maximum number of deals via mergers and acquisitions that catapulted Indian companies into the global league.

“Margins are far higher (in aerospace) and the existing capacity and the same components, such as forgings and aluminium castings, can be used for developing defence and aerospace components,” said Amtek Auto chairman Arvind Dham, who admitted that the trend was catching on among most firms.

“Getting into defence and aerospace segments is a natural diversification for us,” he added. Amtek is one of the largest forgings company in India that makes products for all Indian and foreign auto companies.

The slowdown in the Rs 50,000-crore auto component industry led many firms to cut production, as auto makers battled delayed purchase decisions. According to various component industry associations, the Indian component industry grew by about 3% in the just-concluded fiscal year, in stark contrast to 2007-08, when the industry grew 22%, with revenue of about $18 billion.

“The trend (to shift) is also likely to push deals in this space, with Indian companies looking to acquire foreign firms that have strengths in the aerospace industry,” said Sidharth Punshi, country head for Jefferies India, an investment bank that has done deals for the auto component sector. “A typical acquisition of a foreign company would give Indian firms the technology and expertise to cater to the aerospace and defence sectors,” he added.

It is reliably learnt that Mahindra Systech, a unit of auto major Mahindra & Mahindra, is talking to an Australia-based aerospace company to build smaller planes. “Defence and aerospace are niche and lucrative segments. Although these segments depend heavily on imports, there is still a cost advantage,” said Lumax Auto vice-chairman DK Jain. “Initially, low volumes didn’t permit domestic component majors to start manufacturing these hi-tech components here. Now, we have started getting enquiries for the same,” Mr Jain added.