Auto component companies with a technological edge, global scale advantage or an identified and exploitable niche have better prospects in the current market, says Espirito Santo Securities. It has recommended Balkrishna Industries, Bosch and Motherson Sumi
Auto sales in developed markets are slowly recovering and the worst appears to be over in Europe, with emerging markets still holding up. So, the outlook for auto component exports is improving in India. Further, it is expected that demand from the replacement market will only increase over time. These are the observations of analysts at Espirito Santo Securities on the auto component industry.
Espirito Santo expects that auto component companies with a technological edge, global scale advantage or an identified and exploitable niche have better prospects in the current market. The analysts highlight the following stocks as its picks to play these three themes: Balkrishna Industries, Bosch, and Motherson Sumi.
The global landscape for OEMs (original equipment manufacturers) is becoming increasingly competitive leading them to set up manufacturing facilities in emerging markets like India to take advantage of lower costs. Along with the domestic market, these facilities will also cater to the export market. For instance global OEMs like General Motors, Volkswagen and Ford have manufacturing facilities in India to cater to Indian as well as overseas markets. Hence this is another source of incremental demand for the auto component sector.
The current sluggishness is a cyclical blip in a structural boom, says the brokerage. India has recently crossed the $3,500 per capita income (PPP) consumption threshold, and the exports and replacement market will only support the growth.
On the improving prospects of exports, Espirito Santo observes that as the Indian component players achieve scale and experience they are improving on quality and reducing defect rates which will give growing confidence to US, German and other top auto players to increase imports of parts from India.
According to Espirito Santo, technological edge and a consistent track record of innovation are important in establishing and maintaining a competitive advantage in auto components. However, in the Indian context most firms are just moving up the curve to become globally competitive, and hence innovation and technology will not be the key driver, with the exception of the global firms such as Bosch and Wabco, whose Indian listed entities benefit from the technological edge at the parent level. Bosch is seen as benefiting from a strong technology based competitive advantage, exploiting a dominant share in changing fuel injection technology in India.
The other category to look out for is companies with adequate critical mass that would be difficult to replace in the categories they are present in, and where size is yielding a cost advantage and operating leverage. Also, as demand of global autos recovers these companies should see operating leverage play out in margins. Motherson Sumi is the pick to play the margin improvement trend as global auto sales recover, says Espirito Santo.
A dominant position in a niche category is another area to focus on in the auto component industry, and according to the Espirito Santo, Balkrishna Industries is a small but relevant player in a niche category of Off Highway Tyres (OHT) with limited competition as: it is too small to be a focus area for large global tyre companies; and it has the cost advantage given low cost of Indian plants. The company can sustain superior profitability given the mix of cost arbitrage, distribution and brand strength. It should also benefit from falling prices of the key raw material natural rubber.
The analysts of Espirito Santo have a ‘buy’ recommendation for the stocks of Bosch, Motherson Sumi and Balkrishna Industries in the Indian stock markets.
Equity Mutual Funds witnessed a heavy outflow of Rs1,665 crore along with a decline of 6 lakh folios in December 2012. All this in the last month of the year when the Sensex closed at 19427, up 25% for CY2012
The year 2012 had been a good year for the markets where the Sensex rose by more than 25%. However, equity mutual funds suffered heavy redemptions over the year. December has been the seventh month in a row where there has been a net outflow from mutual funds. In the last month of 2012, equity mutual funds witnessed an outflow of as much as Rs1,665 crore, as per data from Association of Mutual Funds in India (AMFI). Sales touched their maximum in the last nine months at Rs4,125 crore, however, a massive redemption of Rs6,008 crore led to a net outflow. Despite good sales, there was a massive reduction in folios of equity schemes and equity linked savings schemes (ELSS). The number of folios declined by a huge 6 lakh from 3.46 crore in November 2012 to 3.40 crore in December 2012 according to data from the Securities and Exchange Board of India (SEBI).
March 2012 and May 2012 were the only two months of CY2012 which witnessed a net inflow of funds. The remaining 10 months witnessed a net outflow as much as Rs15,678 crore, taking the net outflow for CY2012 to Rs15,567 crore. But not only are fund houses faced with heavy redemptions, there has been a massive decline in folios as well. In the nine month period from April 2012 to December 2012, the number of folios has declined by over 36 lakh. Data from Computer Age Management Services (CAMS) also shows that a large portion of Systematic Investment Plans (SIPs) were withdrawn before the completion of their tenure. From April 2012 to September 2012 as many as 9.78 lakh SIPs were withdrawn before their tenure. (Read: Mutual fund SIPs decline further. Who is to blame?)
In fact this has not been a recent phenomenon. Moneylife has constantly been writing about the declining investor population. Over the past three years from March 2009 to December 2012 there has been a massive decline of 77 lakh folios. As on 31 March 2009 the number of folios stood at 4.17 crore, but since then there has been a constant reduction in folios and as on 31 December 2012 the number stands at 3.40 crore folios. It would be very unlikely that existing investors would keep investing more and more. The net outflow from 1 April 2009 to 31 December 2012 totalled a massive Rs23,317 crore. In this 45 month period, there were as many as 28 months that witnessed a net outflow.
(Read our earlier articles on the issues faced by the fund industry:
It is not that the regulator is not aware of these facts. Just recently it woke up to the declining investor population. However, instead of coming up with policies that are pro-investor, it came up with policies that benefit the asset management companies and punish existing investors. Last year, SEBI came up with the idea of a transaction charge for new and existing investors. However, a majority of the distributors opted out from charging their clients a transaction charge.
Now, after the latest slew of reforms, existing investors would have to bear an increase in costs as mutual fund schemes are allowed to charge an additional expense ratio of upto 30 basis points depending on inflows from the beyond 15 cities. Fund houses are to use this additional revenue to increase their penetration beyond the top 15 cities. However, as the data shows, since the inception of this regulation from 1st October 2012 and up to 31 December 2012, as many as 14 lakh folios have moved out of the industry. In a recent article (Read: Mutual fund regulations: Who contributes the most to equity inflows is overlooked) we showed that independent financial advisors (IFAs) contribute the most to new equity fund inflows especially from beyond 15 cities. Yet the regulator chooses to ignore this ‘small’ distributor community. In fact the new direct route could do more harm to their business as they would lose existing clients who may opt for the plan with lower expenses.
As per the new reforms, direct plans have been launched to benefit direct investors as it would have a lower expense ratio. However, with no proper advice and handholding it is doubtful whether the new route would be able to attract nascent investors.
It took SEBI three years to realise the ill-effect of banning entry load in August 2009. After which it has come out with a new set of reforms which has yet to have a positive effect on the industry. How much longer would SEBI wait to come out with tougher reforms, we would have to wait and see.
Information commissions are increasingly being lenient in penalising Public Information Officers (PIOs) for not providing information that they should, or being absent at hearings at the information commission. If so, are the information commissioners making PIOs and Appellate Authorities unaccountable?
Pune-based RTI (Right to Information) activist Vijay Kumbhar has triggered off a controversy through his column in the Marathi daily Pudhari that despite information commissioners being empowered to penalise Public Information Officers (PIOs), they do not do so even if they do not provide information to the applicant or remain absent for hearing at the information commission. Kumbhar states, “information commissioners are responsible for the worrying trend of government employees not being serious about the RTI anymore as they are often not held accountable.”
He cites two recent decisions of State Information Commissioners in Maharashtra on New Year’s Day, as examples. In the first decision, the applicant who had filed a RTI in July 2011 did not get the required reply and the First Appellate Authority (FAA) did not bother to conduct any hearing. This compelled the applicant to file second appeal with the information commission.
However, when the matter was heard at the state information commission, the commissioner merely ordered that information be given within a specific period by the PIO but he did not levy any penalty on the PIO or question the absence of both the PIO and FAA. Says Kumbhar, “in this case, the PIO or FAA did not bother about the RTI application or appeal filed before them. They even did not have the courtesy to attend the hearing of an appeal before the information commission. But the Commission in its order has not dealt with some basic questions like, what was the information the applicant had sought for? What were the reasons behind not furnishing the information by the PIO? Why didn’t the appellate authority conduct hearing on the first appeal? Why was the PIO and the appellate authority not present for the hearing before the information commission?” The least the information commissioner could have done, says Kumbhar is to issue a show-cause notice as to why they remained absent.
In the second case, says Kumbhar, the applicant did not receive the information that he had asked for from the PIO but the FAA dismissed his appeal by stating that the required information was provided to him by the PIO and that too,10 months after the applicant had filed his first appeal. During the second appeal hearing, the information commissioner did not go into details as to what information was asked for by the applicant? In such a case, the information commissioner has the power to impose fine on the PIO and reprimand the FAA for conducting the hearing after 10 long months but they were not pulled up. If the information commissioners are so lenient, then why should PIOs bother about applications they receive under RTI?
So, are information commissioners advertently or inadvertently killing the power of the RTI Act? Moneylife asked a cross-section of RTI activists:
RTI activist Maj Gen SCN Jatar (retd)
Information Commissioners cannot afford to be lax: Kumbhar’s observations set out in reality how RTI commissioners are set to kill RTI. They do not realise that such decisions are taken as examples of superficiality and laxity in penalising errant PIOs. PIOs are apt to then follow the same methods again and again. The basic criteria that should govern good judgments are a) They should be well-reasoned so that these can be cited in future judgments and ii) they should give a clear message to the errant PIOs that avoiding or evading giving information, which should be in public domain, will not be tolerated. The two cases quoted by Kumbhar do not meet both the above criteria.
Former Central Information Commissioner and RTI activist Shailesh Gandhi
Faster disposal of cases and reasonable threat of penalty required: Most Information Commissioners use the penalty provision as if it was a death penalty to be imposed in the rarest of cases. I do not see any problem with who attends the hearing. The Commissioners should give orders for information irrespective of whether the PIO attends or not. The hearing is an opportunity to present one’s views or argue on required matters. If the appellant or PIO does not attend, they may not want the opportunity of hearing. To believe that when either side is not present, a Commissioner must rule in favour of one who is present does not appear correct or desirable.
I had levied 521 penalties totalling Rs.92 lakh in the 20,400 cases which I decided in three years and nine months. The rest of the Central Information Commissioners collectively imposed penalties in about 330 cases in the Commission and had decided about 80,000 cases. There is no doubt that there is a link of penalty imposition with compliance of the law. If cases are decided fast, and there is a fear of penalties, the PIOs and First appellate authorities become more alert and try to meet the requirements of the law. The total cases received by the Central Commission rose by about 50% in a two year period from 2009 to 2011. The cases for Municipal Corporation of Delhi—which I handled throughout my tenure rose by only 15%. This indicates that faster disposal and a reasonable threat of penalties would get better compliance of the law.
RTI activist Subhash Chandra Agrawal
Each order of Information commission should be comprehensive: It is usually observed that generally penalties are not imposed by Information Commissioners thereby making Public Information Officers (PIOs) lethargic towards complying with provisions of the RTI Act. There should be a practice whereby each order of Information Commissions may carry all the relevant dates like filing a RTI petition, reply of PIO, filing first appeal and of appeal-order. There should be auto-calculation of penalty in each verdict of Information Commissions making penal-provisions under Section 20 of the RTI Act mandatory rather than discretionary as at present. Reasons for waiving or reducing applicable penalty should be specifically mentioned in verdicts of Information Commissions. Information Commissions should maintain record of penalties imposed. Non-payment of penalties in specified time should be reported once in a month to Cabinet Secretary/Chief Secretary who should be duty-bound to initiate disciplinary action against defaulting officers apart from taking steps to recover penalty-amounts from salary/pension payable.
RTI activist Commodore Lokesh Batra (retd)
Applicants should be innovative, interactive with PIOs: Every applicant must realise that it is only after the RTI Act that citizens have become participative in governance. RTI has given us a chance to be an integral part of public accountability so we should not take an adverse stance against PIOs as far as possible. Every RTI applicant should make untiring efforts not to take the case up to the Information commission level as he or she would face inordinate delays, even up to two years. I use innovative methods to interact with the PIOs to extract information in case they hesitate to provide it. Today, I have developed good relations with many public authorities and they sometimes call me for suggestions or advice. Also, after the 2G scam it has been observed that every single reply under RTI at least in the Prime Minister’s Office (PMO) goes to the top bureaucrat so what is the use of blaming or penalising PIOs who are at the mercy of their bosses? Also, in the information commissions, it is the bureaucrats who create more hurdles than the information commissioners themselves.
Researcher and RTI activist Venkatesh Nayak
Public Authorities should take implementation of RTI Act seriously: I agree that to make government employees take RTI seriously PIOs should be penalised but that is just one of the solutions. Penalty cannot be the only deterrent as much as vigilance by higher authorities can be. It is the responsibility of public authorities to clearly push for policy of transparency and that should be visible in action and not by merely issuing paper orders. Serious implementation of RTI cannot be only a PIO’s headache. The top brass of every public authority should regularly monitor and be vigilant about transparency. Mechanisms to check it should work efficiently and should be given top priority. Targets should be set for accountability. Every office has a Monthly Monitoring Report (MMR). It is also called the Monthly Progressive Implementation Calendar in Karnataka. It requires reporting physical and financial progress to superiors who in turn give guidance on the basis of the report. There should also be scrutiny at the highest level, which is legislature. Such professional monitoring has not been seen for RTI. It is only when the government employees know that someone is seriously watching over them, that everyone down the line will take RTI seriously. Perhaps some incentives like increased funding or an award to the Public Authority which implements RTI diligently could help.
To read more from Vinita Deshmukh, please click here.
(Vinita Deshmukh is the consulting editor of Moneylife, an RTI activist and convener of the Pune Metro Jagruti Abhiyaan. She is the recipient of prestigious awards like the Statesman Award for Rural Reporting which she won twice in 1998 and 2005 and the Chameli Devi Jain award for outstanding media person for her investigation series on Dow Chemicals. She co-authored the book “To The Last Bullet - The Inspiring Story of A Braveheart - Ashok Kamte” with Vinita Kamte and is the author of “The Mighty Fall”.)