Auto cos may scout for cheap Europe assests

The slowdown in Europe may give another chance to Indian automobile firms to hunt for cheaper acquisitions or joint ventures for better technologies and market expansions, say analysts.

“We expect more mergers and acquisitions in two-wheelers and trucks than in cars in the Indian automotive industry in the coming decade,” said Vikas Sehgal, global head of automotive and MD, Rothschild, a global financial M&A advisory. “One would not be surprised if TVS Motor Company, Bajaj Auto or Hero MotoCorp go out to buy a global two-wheeler maker. We cannot say now if it’s American, Korean, Japanese or Chinese, but the segment will see some big ticket buyouts by Indian makers,” he added.

The signs are already visible. India’s largest two-wheeler maker Hero MotoCorp, which broke its venture with Japanese Honda Motor in December 2010, has begun investing in new technologies and R&D to sell bikes in the overseas market. The Munjals-owned firm needs to speed up as it can sell products with Honda technology only until June 2014.

“Hero is building their technology know-how and reach in the overseas market,” Chandresh Ruparel, MD, Rothschild (India), said. “It may look at technology buyouts and acquisitions in the global space,” Rothschild’s Sehgal said, adding the company has deep pockets to do so. The company has a cash balance of R1,907.12 crore until March 2011.

Some of the global targets for Indian two-wheeler players include Ducati and Harley-Davidson, Sehgal added, since these are niche players in the sports and touring bike categories, respectively.

Weakening economy and falling asset prices attract Indian buyers. “Asset prices have seen a fall in Europe in the auto parts segment, too, as demand from major markets remain muted and capacities lie under utilised,” Kumar Kandaswami, a senior director at Deloitte Touche Tohmatsu India, said, “There are many small and medium auto component makers in Europe which are private equity-owned and they may look at exiting. Technology and customer base of these companies would be attractive for Indian firms.” Some consultants say the target will be mid-level auto part makers.

“European auto parts companies with sales anywhere between R140 crore and R1,070 crore are targets,” said an auto consultant, who did not wish to be identified, as he is not authorised to speak to the media.

“For auto companies, it would be all about the right target, while for parts makers, small and medium in specific, it would be about how would they finance the deals,” Kandaswami of Deloitte said.

Indian companies have spent less on purchases. Companies spent $352.38 million for M&As between calendar January and now, one fourth of 2010, data collected by VCCEdge, the financial research platform of VCCircle.com, shows.

Smaller truck and bus makers such as Iveco and Paccar, compared to giants Volvo, Scania and Daimler, would be open for tie ups or buyouts in India, Seghal of Rothschild said.

“Indian and Chinese players will consolidate and define the automotive industry worldwide,” Sehgal said. Rothschild estimates that by 2030, India will be the second largest automotive market in the world by sales, overtaking the US. India will add over 20% of the global capacity in the next 10 years. Indian domestic automakers sold 11.3 million units between April and November 2011, data from the Society of Indian Automobile Manufacturers’ report released on December 8 showed.

But the ability of parts makers to fund buyouts will be critical, experts say. Private equity funds can help fund Indian companies’ purchases. “Private equity transactions in the last five years in auto component firms have given them the muscle to look at acquisitions,” said Harish HV, partner, Indian leadership team, Grant Thornton, India.

“We expect M&As to be focused on the auto component segment with small and medium component makers wanting to become tier-I suppliers to global auto companies.”

According to him, the current scenario is no different from what happened in 2008-09 in terms of M&A. “Instead, the situation is better as we have had a good run last year. Talking about certain hiccups faced by auto component makers who went out for acquisitions in Europe and had to change their strategy, Harish said, “There are certain deals that work and certain that do not. It’s part of the game.” Bharat Forge had acquired European forging companies in early 2000, but was hit later as global auto makers cut production in 2008-09 responding to a slowing economy.

“Acquisitions made in the forging business during 2003-2005 were doing well till 2007, but then collapse of the investment bank Lehman Brothers changed everything,” said Amit Kasat, an analyst with Standard Chartered Research in Mumbai. “These companies did not look at bringing down cost and streamlining operations and that’s what happened to Bharat Forge.”