 Budget 2006-07: Auto Ancillaries
The Indian auto ancillary is at the cusp of new growth trajectory. Though currently a miniscule contributor to the global US $ 1 trillion industry, over the past few years, the Indian players have developed and displayed their strengths in the technical and high-end activities. With cost arbitrage and technological advantages, the industry is all set to grow its revenues to US$ 5 bn by FY08, a five-fold rise from the current levels. However, competition from countries like China might disrupt the industry growth in the long run. Read more
|
Peak custom duty reduced from 15% to 12.5% |
|
Excise duty on cars having engine capacity upto 1,200 cc (petrol based engines) and 1,500 cc (diesel based engines) and length of the car upto 4,000 mm reduced from 24% to 16%. |
|
Continued thrust on road infrastructure |
|
Custom duty on alloy steel and non-ferrous (primary and secondary) metals reduced from 10% to 7.5% |
|
Being an ancillary, the performance of the industry is closely linked to the automobile industry. While the positive announcements for the automobile industry should augur well for auto ancillary players, they would also stand to benefit to a certain extent in terms of input costs with customs duty on certain steel products having been brought down. |
|
Though the budget did not spring any surprises for the sector directly, we remain positive on the sector from a long-term perspective. Considering the trends in the global automobile industry, we believe that there exists a huge potential for Indian auto ancillary players going forward. Intensified competition in the global arena would keep margins of auto manufacturers under pressure. Thus, we expect Indian players to benefit from the outsourcing opportunities available, considering India's competitive edge in technical and high skilled jobs as compared to other low cost countries like China. |
|
The reduction in customs duties on certain key inputs, however, is a welcome move. This will ensure that the Indian auto ancillary industry remains cost competitive vis-à-vis major rivals, which will aid in achieving the export target of US$ 5 bn by 2008 (US$ 1.4 bn now). However, any slowdown in the Indian auto industry will hurt the prospects of the companies that rely primarily on the domestic demand. |
Key pre-budget memorandum for 2006-07 from Automotive Component Manufacturers Association of India (ACMA) is as follows: |
|
Setting up SEZs in areas around automotive manufacturing hubs. |
|
Custom duty on auto components to be maintained at current levels of 15%, if not increased. |
|
Reducing the differential customs duty between the auto component and the raw materials to around 10% to 15% from the current levels of 30% to 35%. |
|
Excise duty concessions for all vehicles that have 90% or more of local components against the current policy of excise concessions to vehicle that are designed and developed by wholly owned Indian company. |
|
Extending the 150% income tax deduction on R&D for a period of 10 years and making it applicable to R&D activities that are sub contracted. |
|
Excise duty on small cars and two-wheelers to be reduced to 8% and for other cars to be reduced to 16%. |
| Budget 2003-04 |
|
Budget 2004-05 |
|
Budget 2005-06 |
|
|
|
|
|
|
Additional levy of a cess of 50 paise per liter of diesel and motor spirit, which will contribute Rs 26 bn and help in acceleration of highway development program.
IT companies will continue to enjoy the benefits of 10A/10B benefits even after a change of management.
Reduction in excise duty on cars from 32% to 24% and electric vehicles from 16% to 8%.
Decrease in freight rate on iron and steel by around 5.3%.
|
|
Duty on key inputs such as non-alloy steel to be reduced from 15% to 10%. Duty on alloy steel, copper, lead, zinc and base metals also reduced from 20% to 15%.
Consortium of banks formed to ensure speedy conclusion of loan agreements and implementation of infrastructure projects.
2% education cess on all taxes.
|
|
Customs duty on lead cut to 5%.
Excise duty on tyres, tubes and flaps reduced from 24% to 16%
No change in excise duty on automobiles.
Customs duty reduction on select capital goods and inverted duty structures (i.e., the duty on input costs being higher than the product itself) reduced from 15% to 5% or 10%. Customs duty on the basic plastic material reduced to 10%. Customs duty on selected petro-chemicals reduced from 10% to 5%.
Customs duty on natural rubber maintained at 70%. But peak customs duty reduced from 20% to 15%.
VAT implemented in majority of the states.
|
| |
|
|
|
|
|
| Key Positives |
|
| Huge potential: - Global auto components market is worth over US$ 1 trillion and, considering India's market size, which is just 0.8% of the total market size, there exists tremendous growth opportunity for the domestic auto players to exploit. Having said that, the benefits will vary for Indian companies. We believe that players that have demonstrated their technical competence and have developed necessary scale are likely to benefit from the global outsourcing opportunities. To give an example, around 70% of the total exports are to original equipment manufacturers (OEM) or TIER-1 players as compared to around 35% in early 1990s.
| More than cost arbitrage - Due to cost related pressures on global auto players and Tier-1 suppliers, a lot of them have started outsourcing components from low cost countries like India, China and some of the Latin American and ASEAN countries. However, the technical capabilities of the Indian players have given them the edge in high precision and critical activities. The industry, which exported components worth over US$ 1.4 bn in FY05, is also benefiting from strong domestic sales.
| Learning from the MNCs - The entry of global players such as Ford, GM, Toyota and Honda into the Indian market has allowed the Indian manufacturers to work with these players on global production, quality and delivery systems. It has also helped the global players to see for themselves the evolution of many auto components manufacturers and they are therefore now entrusting them (Indian companies) with more work.
| IT advantage - Thanks to the country's IT advantage, the industry is capable of becoming a full-fledged service provider (research, design, development, testing) to global OEMs and thus score over other low cost countries like China. This, combined with low cost quality manpower strengthens our stand in the global arena.
| | | |
| |
| Key Negatives |
|
| Lacking economies of scale - Despite being around 60 years old, the domestic auto industry is even behind countries like South Korea, Brazil and Mexico in terms of production and sales, thus depriving it the benefit of economies of scale. This makes it difficult for companies to invest extensively in R&D and development, a key competitive tool in the global market. Apart from this, the industry is highly fragmented, which also restricts the Indian players to develop scale (except for few players). Currently there are around 500 players (organised sector), which when compared to the total turnover of the industry indicates the fragmented nature of the same.
| Competitive threats - Though the Indian players have demonstrated their technical competencies, countries like China can spring in surprises in the long run considering the fact that with global auto players increasing their presence in China, the next logical step would be to rise up the value chain (high end auto ancillaries).
| Increasing FTA - The growing number of FTAs (Free Trade Agreements) that are being signed by India with Asean countries is likely to hurt the domestic players as they pay a relatively higher excise duty of around 25% as compared to 1%-10% being paid by their Asean counterparts.
| | |
|
|
|
|
|
|
|
| Sector Performance |
|
| COMPANY |
PRICE (Rs) |
|
| AFFORDABLE ROBOTIC & AUTOMATION |
530.8
(0.5%) |
|
| AKAR TOOLS L |
115.0
(1.1%) |
|
| AMARA RAJA ENERGY & MOBILITY |
1,113.5
(0.7%) |
|
| AMIC FORGING LTD. |
664.5
(0.2%) |
|
| ASAHI INDIA |
607.2
(1.5%) |
|
| ASK AUTOMOTIVE LTD. |
308.2
(-2.4%) |
|
| AUTO CORP. OF GOA |
2,019.9
(0.1%) |
|
| AUTOLINE INDUST. |
124.0
(-1.5%) |
|
| AUTOMOTIVE AXLES |
1,869.5
(-0.9%) |
|
| AUTOMOTIVE STAMP |
820.2
(-2.0%) |
|
| BANCO PRODUCTS |
629.6
(-0.3%) |
|
| BHARAT GEARS |
120.1
(1.6%) |
|
| BHARAT SEATS |
154.1
(-0.7%) |
|
| BIMETAL BEARINGS |
638.6
(-1.5%) |
|
| BOMBAY CYCLE |
1,526.9
(2.0%) |
|
| BOSCH |
28,871.9
(-0.1%) |
|
| CIE AUTOMOTIVE INDIA |
489.8
(0.3%) |
|
| CRAFTSMAN AUTOMATION |
4,686.9
(2.2%) |
|
| DECCAN BEARINGS |
58.9
(-1.3%) |
|
| DIVGI TORQTRANSFER |
833.4
(0.2%) |
|
| DOLFIN RUBBERS |
215.6
(2.6%) |
|
| EL FORGE. |
20.6
(5.0%) |
|
| ENDURANCE TECHNOLOGIES |
1,974.3
(0.9%) |
|
| EXIDE INDUSTRIES |
466.8
(4.4%) |
|
| FEDERAL - MOGUL G |
376.7
(0.8%) |
|
| FIEM INDUSTRIES |
1,211.5
(1.0%) |
|
| GABRIEL INDIA |
349.8
(-0.7%) |
|
| GKW. |
2,500.0
(3.0%) |
|
| GNA AXLES |
415.7
(0.2%) |
|
| GS AUTO INT. |
40.8
(-1.8%) |
|
| HAPPY FORGINGS LTD. |
947.7
(1.8%) |
|
| HI-TECH GEARS |
1,135.6
(-2.2%) |
|
| HIGH ENERGY |
906.1
(-1.8%) |
|
| HIM TEKNOFORGE |
138.4
(-1.2%) |
|
| HIND HARDY SPICE |
482.0
(0.9%) |
|
| HIND.COMPOSI |
423.3
(-0.3%) |
|
| INDIA NIPPON |
715.6
(-0.1%) |
|
| INDO NATIONAL |
724.5
(-0.3%) |
|
| IP RINGS |
175.2
(-2.3%) |
|
| IST |
981.7
(0.7%) |
|
| JAINEX AAMCOL |
147.7
(1.2%) |
|
| JAMNA AUTO |
132.4
(-1.6%) |
|
| JAY BHARAT MARUTI |
120.4
(2.8%) |
|
| JBM AUTO. |
1,781.9
(-2.1%) |
|
| JTEKT INDIA |
179.1
(-0.4%) |
|
| KRANTI INDUSTRIES |
74.4
(-0.8%) |
|
| L.G.BALAKRISHNAN |
1,309.0
(0.3%) |
|
| LUMAX AUTO TECHNO |
479.4
(-1.8%) |
|
| LUMAX IND |
2,509.8
(-1.7%) |
|
| MAH. SCOOTERS |
7,908.3
(-1.5%) |
|
| MAKS ENERGY SOLUTIONS |
61.5
(-0.8%) |
|
| MENON BEARINGS |
129.0
(-0.3%) |
|
| MENON PISTON |
95.2
(1.9%) |
|
| MINDA CORPORATION |
406.8
(-0.7%) |
|
| MOTHERSON SUMI WIRING |
69.6
(-0.8%) |
|
| MUNJAL SHOWA |
163.2
(-0.1%) |
|
| NDR AUTO COMPONENTS |
847.8
(-0.1%) |
|
| NEW SWAN MULTITECH LTD. |
73.5
(-0.8%) |
|
| NRB BEARINGS |
314.1
(-0.4%) |
|
| NRB INDUSTRIAL |
35.6
(-1.0%) |
|
| OMAX AUTOS |
122.3
(2.0%) |
|
| PAE |
4.8
(-1.8%) |
|
| PANKAJ PIYUSH |
109.1
(4.8%) |
|
| PATTECH FITWELL TUBE COMPONENTS LTD. |
89.5
(-0.9%) |
|
| PORWAL AUTO |
57.1
(0.4%) |
|
| PPAP AUTOMOTIVE |
206.0
(-0.4%) |
|
| PRECISION CAMSHAFTS |
212.3
(-1.5%) |
|
| PRECISION METALIKS |
51.0
(-1.7%) |
|
| PRICOL |
430.5
(-0.9%) |
|
| PRITIKA ENGINEERING COMPONENTS LTD. |
65.8
(1.2%) |
|
| RACL GEARTECH |
1,312.9
(-0.2%) |
|
| RAJKUMAR FORGE |
102.8
(4.8%) |
|
| RAMKRISHNA FORG |
762.2
(0.2%) |
|
| RANE BRAKE |
833.0
(-1.1%) |
|
| RANE ENGINES |
371.8
(1.0%) |
|
| RANE MADRAS |
819.9
(-2.6%) |
|
| RASANDIK ENG. |
92.5
(-0.1%) |
|
| REMSONS IND. |
971.9
(0.4%) |
|
| RICO AUTO |
137.4
(-1.4%) |
|
| ROLEX RINGS |
1,870.5
(0.4%) |
|
| SAI MOH AUTO LINKS |
25.8
(5.0%) |
|
| SAL AUTOMOTIVE |
540.4
(-2.6%) |
|
| SAMVARDHANA MOTHERSON |
131.2
(3.1%) |
|
| SANDHAR TECHNOLOGIES |
508.9
(-1.7%) |
|
| SCHAEFFLER INDIA |
3,334.9
(1.9%) |
|
| SCHRADER DUNCAN |
444.9
(-0.6%) |
|
| SETCO AUTOMOTIVE |
12.8
(5.0%) |
|
| SHANTAI INDUSTRIES |
36.0
(-3.5%) |
|
| SHIGAN QUANTUM |
106.0
(-7.8%) |
|
| SHIVAM AUTOTECH |
42.4
(-0.6%) |
|
| SIBAR AUTO |
12.1
(-0.8%) |
|
| SIMMONDS MARSHALL |
85.0
(-5.6%) |
|
| SINTERCOM INDIA |
130.1
(0.4%) |
|
| SJS ENTERPRISES |
612.4
(-0.2%) |
|
| SKF INDIA |
4,604.0
(-1.4%) |
|
| SKP BEARING INDUSTRIES |
251.0
(7.2%) |
|
| SMITHS & FOUNDERS (INDIA) |
5.5
(1.1%) |
|
| SNL BEARINGS |
394.7
(0.9%) |
|
| SONA COMSTAR |
647.8
(-2.9%) |
|
| STEEL STRIPS WHEELS |
227.0
(1.3%) |
|
| STERLING TOOLS |
355.4
(-0.4%) |
|
| SUBROS. |
634.2
(-2.5%) |
|
| SUNDARAM BRAKE |
739.5
(0.4%) |
|
| SUNDRAM FASTENERS |
1,102.3
(4.0%) |
|
| SUPRAJIT ENGINEERING |
418.7
(0.5%) |
|
| TALBROS AUTO |
296.0
(-1.0%) |
|
| TAPARIA TOOL |
3.7
(4.8%) |
|
| TIMKEN INDIA |
3,197.5
(0.4%) |
|
| TIRUPATI FORGE |
18.7
(-1.3%) |
|
| TIRUPATI TYRES |
67.9
(-0.8%) |
|
| TRITON VALVE |
2,855.0
(-1.6%) |
|
| TVS HOLDINGS |
8,421.6
(-1.2%) |
|
| UCAL FUEL |
184.4
(-2.9%) |
|
| UNIVERSAL AUTOFOUNDRY |
175.0
(-0.2%) |
|
| URAVI WEDGE LAMPS |
407.8
(1.3%) |
|
| WHEELS INDIA |
581.7
(0.1%) |
|
| ZF COMMERCIAL |
13,868.4
(-0.9%) |
|
| ZF STEERING |
1,086.1
(0.6%) |
|
|
|