For a city that prides itself on its entrepreneurial skill and risk-taking ability, the prolonged slowdown in the automobile industry has cast a shadow on auto component suppliers in Coimbatore.
The city boasts some prominent auto component companies such as Pricol and L.G. Balakrishnan & Bros, which are listed on the stock exchanges. The city also has a number of tier-I, II and III suppliers catering to the needs of the entire gamut of the automobile industry, ranging from two-wheelers and four-wheelers to commercial vehicles and tractors.
In a recent report, India Ratings & Research (Ind-Ra) warned that the auto component industry would face “subdued demand over the short-to-medium term” and would grow at a “much lower pace of negative 2 per cent-1 per cent y-o-y in FY15”. This was because of a 3-5 per cent decline in production at the OEMs level, the replacement market growing at 4-6 per cent and a 7-10 per cent spike in exports.
What came as a relief was the growth in the export market and the efforts of the foreign auto companies operating in India to increase localisation to beat the impact of a weakening rupee. The auto component suppliers are also looking at diversification into other product segments as a cushion against uncertain demand from the automobile industry, the Ind-Ra report said.
The rating agency, which has kept a 'stable to negative outlook' on automobile suppliers because of persistent weakness in demand, said the outlook could be changed to stable only if there was a 'sustained revival in auto demand'. But any more deceleration in demand would further hit the operating cash flows and credit profile of domestic automotive component suppliers. What would pinch them further is a 'worse-than-expected liquidity crunch'.
Speaking to Business Line , K. Ilango, Managing Director, RSM Autokast Ltd, Coimbatore, a manufacturer of brake drums for heavy duty trucks and trailers, said apart from Pricol and LGB & Bros, there were around 20-25 tier-I auto component makers in the city and more than 100 tier-II and III component suppliers here. The total turnover of auto component suppliers from Coimbatore could have been around Rs 5,000 crore in 2012-13. Of this, the share of tier-II suppliers (foundries, machine shops, tool and pattern suppliers, etc) could have been nearly Rs 1,000 crore.
He said the component suppliers might have seen a 10 per cent contraction in top line. But the bottom line had taken a greater hit ranging between 25 to 50 per cent.
The auto component industry in Coimbatore is a major source of livelihood, with the tier-I, II and III companies together employing around 15,000 people. The drop in orders had mostly hit tier-I suppliers whereas the tier-II and III suppliers had looked at other avenues to mitigate the impact of the slowdown.
Among the suppliers, the two-wheeler component makers escaped relatively unscathed since that sector witnessed 'positive growth’ this year. But as the two-wheeler producers went on a capacity expansion spree, many of them were working at 'sub-optimal levels’ and this has affected their component suppliers.
Ilango, who is a former President of the Coimbatore District Small Industries’ Association (Codissia), said component suppliers to cars, MUVs and SUVs had also taken a hit since their volumes were low and were trying to expand their customer base. But what had come to their rescue was the effort of the OE manufacturers for greater localisation in view of the weakening of the Indian rupee so as to contain cost.
However, the worst affected were the suppliers to commercial vehicle producers because of the huge de-growth registered by this sector due to economic stress. He said the tier-I and II suppliers to the CV producers were looking at the export market to overcome the decline in domestic demand and the weakening rupee has made Indian products price competitive compared to China. Some have also diversified to meet demands of pumps and valve manufacturers. The only silver lining seems to be the strong tractor demand. The truck owners also seem to be reluctant to replace parts quickly as the truck rentals have remained weak. This has affected the sales in the replacement market.
He said the auto component manufacturers in Coimbatore faced a tough situation and would be unable to maintain their top line in 2014 FY whereas their bottom line had suffered a huge hit. He said the component producers, given the demand situation, also were not looking at any capacity addition.
Ilango said the recent move of the Tamil Nadu Government to deny VAT credit for sales made outside the State has pushed up the cost of production. This had eroded the cost competitiveness of the component producers here who have to “work with very little margin or lose market share”.