Macro Moves

Has the auto industry revival started from May?

Created on 04 Jun 2020

Wraps up in 5 Min

Read by 4.2k people

Updated on 08 Sep 2020

Suppose you are stranded in a desert and you’ve lost your way back. After walking a few miles, you would see only one thing – endless desert. And, one thing which will trouble you the most would be thirst. With increasing level of thirst you would feel more disgusted. But, what if you spot an oasis? Your hope of staying alive will rejuvenate and that would probably be the best feeling in the world. Such hope has probably been found by ailing auto sector as well.

After a locked down April which also resulted in hardly any car sales, May has given a hint of relief to the ailing auto sector. The May sales figures are not that encouraging as compared year on year but still, they are sufficient to make the automobile manufacturers forget the plight offered by April. The manufacturing plants are also slowly resuming their operations and now, it all depends upon the demand revival in near future. Keep reading for the details of this update.

What Just Happened?

Covid-19 crisis hit the auto sector really hard and there’s no doubt about it. But, the sector was already struggling and the crisis just made things worse. Remember the time when auto sales were tanking and our Finance Minister blamed Ola and Uber for the same? The sales were struggling to come back to normal but just then, the pandemic arrived. Forget about revival, the sales literally stopped!

As April was all about lockdown in the country, the manufacturing plants had no option but to temporarily shut down. However, a few of them (including Maruti Suzuki and Mahindra & Mahindra) manufactured ventilators instead of cars. This helped the government and was a sort of innovation for them as well. But, of course they couldn’t exit the car making and selling business and start making ventilators forever. So, they waited, and the month of May brought some sales.

Let’s come back to where we started from. The oasis might not quench your thirst completely and it might not even the best source of potable water, but it will not let you die. The May sales figures in a similar way are giving a ray of hope to the automobile companies. Maruti Suzuki and Hyundai have sold the most cars during may i.e. close to 25000 units combined (including exports). This is a decline of almost 80% as compared to last year but it’s a been when compared with last month. Experts expect that sales would increase in near future as people would be hesitant to travel from public transport and might well go for purchasing a personal vehicle.

IFB Industries Limited (IFB) 

IFB originally known as Indian Fine Blanks has started its operations in India in 1974 in collaboration with Hienrich Schmid AG, Switzerland. It is a mid-cap company operating in consumer durables which includes key segments namely engineering and home appliances. The products of the engineering segment include fine blanked components and tools whereas home appliances include washing machines, dishwashers, dryers, air conditioners, and microwave ovens, etc.

The company is aimed at becoming the consumer’s first choice by manufacturing and marketing top quality products. It entered into white goods market in 1990 by jointly launching automatic washing machines with Bosch, Germany. IFB is also known for launching India’s first front load washing machine, first clothes dryer, first dishwasher, and India’s first smart load washing machine.

IFB group is also engaged in agro and automotive businesses. In agro business, it is involved in the export of marine products, ready to cook and ready to fry foods, aqua feeds (shrimp & fish feed), and aqua shop (unique rural retail chain).

The white goods market is highly concentrated in India in which 75% of the market is dominated by the top 5 players in washing machines and refrigerators while 55-60% is dominated by air conditioners and fans. This market is highly seasonal with major sales happening during the festival season. IFB exclusive stores (650+) contribute about 14% of sales by volume.

The channel of distributors which added around 9500 new retailers in the last few quarters accounts for 14% of sales. In Q3FY20, a major portion of home appliances revenue came from front-load and top load washing machines contributing 51% and 17% respectively. The firm is highly dependent on the import of raw materials which is affecting its profitability because of fluctuations in exchange rates. To address this, IFB has taken a localization (manufacturing high-cost import) initiative as a de-risking mechanism which is helping in reducing production costs and dependence on supply.

The Indian auto components industry is expected to register a turnover of $ 100 billion by 2026 from the current $ 11.2 billion. IFB is the premier fine blanker in India having fine blanking presses, with capacities ranging from 90T to 800T. The research and development center equipped with high-end software is responsible for the design and analysis of various products.

It has excellent manufacturing facilities to convert these designs into a physical form of international standards meeting expectations of its clients. Its engineering division business partners include Maruti Udyog, Ford India, Fiat India, Toyota Kirloskar, Lucas TVS, Brakes India, Autoliv India, and IFB automotive, a group subsidiary to name a few. It helps them in designing the components during the initial stage of product development by delivering finished goods on time.

Revenues of IFB stood at ₹ 2552.28 Crores with an annualized growth rate of 18.43% for the last 9 years and average revenue per employee grew at 7.99% during the same period. But the bottom line has seen fluctuations owing to market competition and higher operating expenses as most of the raw materials are imported which are susceptible to exchange rate fluctuations.

In the way forward, the increasing disposable income, easy consumer credit, e-commerce reliability, and growing working population may contribute to sales growth and eventually profitability.

What is good?

  • Dominant market share in the clothes dryer (70%) and dishwasher (50%) whereas in industrial laundry and dishwasher equipment its share stood at 35-40%

  • Good brand image because of its strong after-sales service with a network of 964 service franchises across India helping in building customer (4 million+ customer base) relationships

  • Localization initiative to manufacture high-cost import components within India will help in reducing dependence on supply and production costs

What is Bad?

  • In the home appliances division, consumers have higher bargaining power because of the presence of a multitude of brands resulting in lower profits

  • Huge competition from existing and new MNC competitors may affect its market share

  • Its limited range of products might divert consumers and its dependence on raw material imports may affect its profitability owing to fluctuations in exchange rates

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Deb P Samaddar

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If people could be named after idioms, Deb would be called "I'm all ears." His brain is a storehouse, ever overflowing with derelict information. So, while most things he talks about are as useless as occasion-less greeting cards, everything he writes has the potential of bagging you multiple diplomas!

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