Private equity firms are shying away from investing in Indian auto parts makers, hitherto one of their favourites, citing muted medium-term growth potential, but experts said the long-term outlook remained positive.
Private equity (PE) investment was likely to return once the sector tides over its current problems – falling domestic demand amid sluggish auto sales and high interest rates and stunted export growth, thanks to a hardening rupee, they said.
“Manufacturing used to be the second most favourite sector for PE investors for almost two years and now it's nowhere in the top five,” Arun Natarajan, chief executive at Venture Intelligence, which tracks private equity deals, said.
A third of all manufacturing deals used to be in the auto components sector, he added.
PE firms invested about $215 million rupees in nine auto parts makers in 2006 but have managed to put in just about a third of that in three firms so far in 2007, according to VC Circle, that tracks India's deal economy.
Warburg Pincus, New Vernon Private Equity, Standard Chartered Private Equity, DE Shaw, International Finance Corp., Actis Advisers Pvt Ltd., IL&FS Investment Managers are some of the private equity investors in the sector.
“The rise in interest rates had a dampening effect on auto demand, which has led to some auto component companies deferring fund raising,” Nainesh Jaisingh, head of Standard Chartered Private Equity in India, said.
Standard Chartered Private Equity invested $33 million in unlisted Endurance Technologies in August. “Irrespective of such immediate issues, companies will invest in capacity and inorganic growth. Fund raising will be a natural corollary,” he said.
“The likelihood of depressed profits is turning the sector at large unattractive. But I still see private equity interest in firms that have outperformed,” Amtek group chairman Arvind Dham said over the telephone.
Warburg Pincus invested $65 million for a 9 percent stake in Amtek Auto in August 2006.
Car sales growth slipped to 12.3 percent in April-July, from an average growth of 20 percent over the past two years, and two- wheeler sales fell 9.2 percent during the four-month period, according to the Society of Indian Automobile Manufacturers.
DIGESTING PAST INVESTMENTS
Industry experts reckon PE firms could be waiting for returns from their past investment before infusing more.
“It could also be that most of the mid-sized players amenable to private equity have been taken and the industry is waiting to digest those investments,” Venture Intelligence's Natarajan said.
“Companies have not gone ahead and taken the challenge. There are very few compelling growth stories,” the head of a top auto component group said on condition of anonymity. The mere expansion story is over.”
Most of the PE funds were used to fund overseas acquisitions, New Vernon's Rajiv Sahani said. New Vernon invested $10 million in Amtek India in August 2006.
Rising valuations of foreign firms have spooked acquisition plans and thus the need for money, analysts said.
While firms could be bought for as low as three times core earnings earlier, the asking price has more than doubled with rising appetite from Asian firms, they said.
“Private equity investors are still knocking the doors of us and our peers. It is just a timing issue. It will even out over the next few quarters,” Sona Koyo Steering Systems Ltd. chairman Surinder Kapur said.
The Sona group was one of three auto parts makers that attracted private equity in 2007. JM Financial invested $28.5 million in Sona's group holding firm.
Source: Reuters