Auto Monitor - 27 August 2012

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I N D I A ’ S N O . 1 M A G A Z I N E F O R A U T O M O T I V E N E W S , V I E W S & A N A LY S I S

Auto Monitor ly k e We

Vol. 12 No. 27

27 August 2012

www.a mo n l i n e .i n

FOCUS

50 Pages

` 50

INTERVIEW

SOUTH INDIA Pg 14-24

“After September this year, we expect the localisation to go up to 80 percent from 70 percent” Sandeep Singh, Deputy MD (Marketing), Toyota Kirloskar Motor

Pg 8

Fourth NEI plant to be operational by Q3 in Gujarat Nabeel A Khan New Delhi

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K Birla Group owned bearing manufacturer National Engineering Industries (NEI) is setting up a new plant in Gujarat with a capacity of around twenty million (two crore) units per annum. The company will invest around `500 crore in this plant in the next five years to make the facility equipped with high level automation. NEI, which manufactures bearings under the brand name of NBC Bearings, is making this investment as part of its `700 crore investment plan to be implemented over the next five years that it had chalked out earlier this year. “We are planning to set up a new plant in Gujarat, the land for which will be finalised shortly. We expect that the production from this plant should start in the third quarter of the next financial year,” said President & Chief Executive

Officer, NEI, Rohit Saboo. The decision to move to the western state of Gujarat comes as many of the customers including Hero MotoCorp, Tata Motors and Maruti Suzuki have either already built their units or are in the process of setting up of their respective plants. NEI hopes to increase the efficiency of the new plant by at least 15 percent because of the improvement in the process technology, new machine and high level of automation. The component maker is also looking at reducing the quantity of nickel to offset the increasing cost of raw material. “Actually the quality of material is extremely important in bearings. We are currently testing alternate materials which may be cheaper in the long run. These tests will take at least one and a half years to complete and only then we will be able to decide on alternate material,” Saboo added The company does think that the current blip will impact

NEI is making this investment as part of its `700 crore investment plan to be implemented over the next five years that it had chalked out earlier this year

Rohit Saboo, President & CEO, NEI

in short run but in the long run the Indian growth story is likely to remain intact. The company continues with its previously announced investment plans to be implemented in the next five years. The company is looking to invest around `500 in the Gujarat plant while rest `200 crore will be invested in the existing three plants. It remains bullish and hopes that by 2016, it will be able to

double its revenue to `2,000 crore. The company is also looking at multiple suppliers of steel to avoid monopolistic pressure. Currently it has two suppliers but hopes that in near future it will develop more suppliers. Ironically, NEI has increased its exports to Europe even though the European economy is suffering. This is because the component manufacturer’s presence in Europe was relative-

ly small. Now it is adding new customers in Europe and approximately 10 percent of total exports is going to Europe. NEI claims to have maintained profit margins comparable to the industry and going forward, it is looking at value addition within its product range itself and not planning any diversification. The component maker has increased its spending on R&D from less than 0.5 percent of its turnover few years back to more than 1.25 percent of the turnover now.

Tractor demand to revive, maintain healthy growth Our Bureau Mumbai

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ractor segment has been witnessing a downtrend since November last year, after having experienced

DATA MONITOR Top 5 2W makers Company

July-11

July-12

Change

HML

441,520

473,033

7.14%

HMSI

141,791

227,591

60.51%

Bajaj Auto

202,326

200,535

-0.89%

TVS

160,345

140,806 -12.19%

26,429

39,545

Suzuki

49.63%

Top 5 2W-Exporters Company

July-11

July-12

Bajaj Auto

115,769

108,323

Change -6.43%

TVS

26,324

17,092

-35.07%

HML

16,107

11,184

-30.56%

HMSI

10,493

11,391

8.56%

IYM

9,176

9,135

-0.45%

* Source: SIAM/ ** Excluding exports/ *** all sub segments considered/ ^ excluding MRPL

robust growth over the preceding two years. Tractor volumes (domestic +export) declined by 3.4 percent (YoY) in fourth quarter in the last fiscal, and posted modest 2.8 percent growth during the first quarter this fiscal, according to a recent ICRA study. The rating agency points out that tractor sales volumes is likely to witness a growth of 0-three percent for the current fiscal and maintain a volume Compounded Annual Growth Rate of around eight to nine percent over the next five years. As per the study, the cyclical demand slowdown is led by the eroding purchasing power of farmers with decline in farm-gate prices post bumper harvest in the rabi season and delay in offtake from market intermediaries. The demand from the non-agricultural segment, which is around 20 percent of sales, has been impacted by slowdown in construction and infrastructure projects. The study points out that high interest rate regime and price hikes taken by tractor manufacturers also deterred farmers from

purchasing mechanisation tools. The demand side economics in the tractor industry however continue to find favour from structural and long term drivers such as support from the Government of India towards rural development and mechanisation, scarcity of farm labour especially during the sowing season, increase in credit flow to agriculture, growth in high and low power segments, moderate penetration, shortening replacement cycle and healthy exports. ICRA expects tractor sales growth to be tepid in the second quarter of the current fiscal, with fear of draught effecting consumer sentiments, as well as high base of last year, which saw record volume sales during festival season. The unit sales growth is expected to recover in the second half of the current fiscal, on the back of higher Minimum Support Price (MSPs) and low base, provided there is recovery in monsoon rainfall, which so far has been in deficit. “In terms of regional performance, demand from southern states has shrunk rapidly over the course of last two quarters (-34.5

percent in Q1FY13 and -18.3 percent in Q4FY12) led by draught like conditions in Andhra Pradesh and Karnataka, apart from weak prices of cotton and spices,” said Senior Vice President & Co-Head, Corporate Sector Ratings, ICRA, Subrata Ray. He pointed out that even the western region reported sluggish performance with volumes declining by 10.9 percent in first half of last fiscal, stemming from correction in prices of cash crops like sugarcane and cotton. The study revealed that the northern region, which accounts for over 35 percent of domestic tractor industry volumes, supported industry figures and posted healthy 14.1 percent YoY growth during the first half of the last fiscal, notwithstanding lower sales in Uttar Pradesh because of state assembly elections. While states like Punjab and Haryana shall continue to generate healthy replacement demand, ICRA expects the southern markets to recover from this blip and outperform the national average over the medium term, given low tractor penetration, increase in

area under irrigation, and increasing focus by tractor OEMs and financers on this region. Outlook for exports also looks promising through inclusion of new export destinations, increased product offerings in the higher HP segment, ramping up of capacities as well as investments by OEMs to meet stricter emission norms, and greater acceptability of India as a cost effective and a reliable manufacturing location. In an effort to battle sluggish demand scenario, tractor OEMs have expanded and refurbished their product portfolio to come out with more application based offerings, and to cater to niche market segments. Industry players witnessed a decline in profitability during the last fiscal due to a partial, or delayed pass on of increased cost of production and higher base effect. Although players like Escorts and M&M have been able to protect their PBIT margins in the first quarter of the current fiscal, weak demand outlook and increase in manufacturing capacity,portend margin pressures over the near term.


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