Even as Indian auto parts firms are busy catering to domestic demand that is growing at a scorching pace, they are looking at good deals to acquire counterparts, especially in the developed markets

On Monday, auto parts maker Motherson Sumi Systems Ltd (MSSL) announced the acquisition of the Netherlands-based Reydel Automotive Holdings BV for $201 million (around Rs1,300 crore). Indeed, acquisitions are not new to MSSL—it has about 20 acquisitions to its credit over nearly two decades and has said that this is its preferred route to reach its fiscal year 2020 target of achieving $18 billion in revenue.

In recent times, the acquisition bug has bitten other Indian component suppliers too. Even as they are busy catering to the demands of the domestic auto sector that is growing at a scorching pace, they are looking at good deals to acquire counterparts, especially in the developed markets.

Just a few days ago, Maharashtra-based Precision Camshafts Ltd, a leading supplier of camshafts to most passenger vehicle manufacturers, acquired German MFT Motoren und Fahrzeugtechnik GmbH for an undisclosed sum.

About a week ago, wiring harness manufacturer Dhoot Transmission Pvt. Ltd acquired the UK-based Parkinson Harness Technology, which follows a couple of other acquisitions made in the UK and Scotland a few months ago.

And the list goes on. Even the recently listed Sandhar Technologies Ltd said that it tapped capital markets partly to prepare for acquisitions.

Why are Indian companies thirsty to acquire counterparts abroad?

The evident reason is that most mid-sized firms are operating at optimum capacity utilization as they are riding piggyback on growing domestic vehicle sales. This has led to a 40-50% rise in cash and bank balances in some of these firms over the last five years.

Meanwhile, overseas component makers, especially in developed markets, are having to deal with a mature auto market, where sales growth is tepid. Hence, valuations in these regions look attractive for acquirers.

Also, the Indian acquiring firm that is hungry to expand gets ready access to new markets and customers, mainly original equipment manufacturers (OEMs). For instance, with Reydel in its bag, MSSL will have access to 20 manufacturing facilities in about 16 countries, some of which would be new regions for MSSL.

Note that most of these firms have product portfolios that are unlikely to be affected by the technology disruptions anticipated in the auto industry due to a major shift towards electric vehicles. Hence, access to global technology through the inorganic route would save on time and costs needed to cash in on the growing demand for vehicles in emerging markets too.

According to Abdul Majeed, partner at Price Waterhouse, “Apart from reasons such as valuations being attractive and the access to new customers and new regions, an overseas acquisition enables suppliers to be in proximity of global OEMs. Sometimes, the OEMs themselves push or lead component makers to buy assets that may be a win-win for both.”

Also, although Europe and North America may be markets where growth is slow compared to emerging markets, one must note that these two regions account for nearly two-thirds of India’s component exports.

That’s not all. There are mergers and acquisitions (M&As) visible on home ground too.

According to Venture Intelligence, a service provider that tracks deals and financial transactions across industries, the auto component industry witnessed 13 M&A deals in calendar year 2017 and four in the first three months of 2018 (overseas and domestic).

To sum up, Indian auto component manufacturers are on the fast track. Even stock prices have zoomed in the last 12 months, leading to rich valuations of 15-20 times the estimated one-year forward earnings per share. Given the tight profit margins that they operate on, revenue expansion is critical for profit growth. More often than not, a well-timed acquisition helps the cause.