‘Exposure to US majors is 3-4%, default in payments unlikely’.
Parvatha Vardhini C.
BL Research Bureau Despite auto and auto component stocks being bogged down by fears of global auto giants – General Motors, Ford and Chrysler – going belly up, Indian component makers remain sanguine about their own prospects.
While the Detroit trio keep their fingers crossed as the Congress debates their bailout package, component makers in India feel that the companies may not be allowed to go bankrupt.
Explains Mr V.G. Jaganathan, President-Finance, Sundram Fasteners, whose supplies to GM include radiator caps and fasteners: “While in India bankruptcy means winding up, in the US, it is restructuring.”
Says Mr Ajith Kumar Rai, MD, Suprajit Engineering, which makes automotive cables for GM: “I don’t really see a Chapter 11 happening. The auto sector worldwide will freeze (if that happens).”
One key reason why some of the Indian component makers aren’t too perturbed is the limited exposure they have to these companies.
“GM’s contribution to the revenues is minor, about 2-3 per cent,” says Mr Jaganathan of Sundram Fasteners. About 3-3.5 per cent of the consolidated revenues of Bharat Forge come from these companies globally.
Rico Auto, a single source supplier, is monitoring the situation closely. “The group gets about 4-6 per cent of revenues from GM and Ford globally. The maximum exposure at any given time to GM in the US is under $2 million. We are monitoring inventory and receivables to maintain limited exposure. However due to the overall slowdown in the global auto industry, the exposure will ramp down proportionately,” says Mr Arvind Kapur, the company’s MD.
Even if the automakers do file for Chapter 11 protection, Indian vendors seem to be equipped to handle the situation. One reason is that, they don’t see a big possibility of a default in payments.
Mr Sanjeev Joglekar, CFO, Bharat Forge which supplies engine components from India to GM and Ford, says, “So far, we have been receiving payments on time. In case of bankruptcy, we expect to be paid as a foreign supplier might have protection/preference in such a case. Also, in an earlier case when one of our clients went bankrupt, payments did come.”
Sundram Fasteners too does not expect any delay in payments in the future. Others like Mr Kapur are confident of payments because of their status as single source suppliers. “In case of filing of Chapter 11 (bankruptcy reorganisation) there may be delays in current receivables, but we expect to be paid in full as we are the single source supplier for these parts.”
But smaller suppliers such as Suprajit Engineering sound a tad less optimistic. “In case of bankruptcy, we expect a negotiated settlement. Therefore, our outstandings might take a knock.”
Mr Jayanth Davar, Vice-President, Automotive Component Manufacturers Association (ACMA), says, “While large majors who supply components may not be affected, Tier 2 and Tier 3 players, who are indirect suppliers, will be more affected.”
The non-availability of ECGC cover now compounds the problem of credit crunch. “The working capital limit (for loans) does not cover exports…. If the payment cycle gets delayed, smaller companies can’t afford it…. Today, the value of exports is down. There is also no ECGC cover. Banks refuse to lend as they feel these assets are risky and may become non-productive.”