India’s leading automobile equipment and capital goods makers are set to reap rich rewards soon, thanks to their emphasis on building export capabilities over the past decade.
According to a report by Kotak Securities Institutional Equities, select auto and auto component and engineering companies with export-oriented focus have enjoyed superior profitability vis-à-vis their domestic counterparts and have also gained market share in their respective export geographies.
“This can be attributed to labour cost arbitrage vis-à-vis developed economies, ramping up of investments in R&D capabilities, providing superior product offerings and setting up of extensive distribution and service networks,” the report said.
Some companies have also boosted their product/service offering, either through higher resource allocation by the global parent into India or expansion of technology offering/reach through joint ventures, it added.
Meanwhile, lower corporate tax has improved the competitive positioning of Indian companies in global markets.
As the global economy continues to grapple with Covid-19, the brokerage believes domestic auto and engineering companies with strong balance sheets and strong presence in the export markets can seize this opportunity to further penetrate into their respective geographies and gain market share from the competitor.
However, the report also highlights the need for support from the government to address weak infrastructure and work on ease of doing business even as Indian companies have the strengths of the abundant and skilled labor force, low corporate tax rate, and a large domestic market.
The brokerage believes that companies such as Bajaj Auto, Balkrishna Industries, Bharat Forge, Timken India, Schaeffler India, Cummins, ABB, and Thermax are well placed.
“Bajaj Auto has gained 10 percent market share from the Chinese players in the African market over the past 10 years. We believe the company will continue to gain market share led by superior product offerings, better distribution network, and weakening balance sheet of Chinese competition due to sharp decline in conventional two-wheeler demand in the Chinese market,” the report noted.
Balkrishna Industries is well-positioned to gain further market share in the EU and US regions led by low labor cost arbitrage, expansion of product portfolio, expansion of distribution network to deepen its presence in the replacement market and significant spends in promotional activity to create brand awareness, according to the brokerage house.
Also, for Bharat Forge, it believes that the company can be one of the leading players in sectors such as defense and aerospace, railways or e-mobility given its engineering prowess in the field of engineering and metallurgy. Constant focus on upgrading R&D capabilities will help them add new products as well as new customers going forward, it said.
Further, domestic bearing companies are expected to significantly ramp up their export revenues given favorable cost structure in India and global MNCs looking to diversify their supply chain from China.
Among the listed players, Timken India and Schaeffler India are believed to be well-positioned to gain from anticipated structural change in the procurement of parts globally.“Also, these companies have set-up R&D facility and with a higher focus on localization (instead of procuring parts from the parent), we also expect profitability of these companies to improve going forward,” the report stated.