Auto component industry may see 6-8% revenue contraction last fiscal: Report

  • The rebound in the current financial year is expected to be strong at 20-23 per cent, benefitting from demand pickup, the low base of FY2021 and the impact of commodity prices on realisations.
Inside view of a Volvo Cars factory that is to restart the production after a standstill due to the coronavirus disease (COVID-19) situation, in Torslanda, Gothenburg, Sweden April 17,2020. Adam Ihse/TT News Agency/via REUTERS ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. SWEDEN OUT. NO COMMERCIAL OR EDITORIAL SALES IN SWEDEN. (via REUTERS)
Inside view of a Volvo Cars factory that is to restart the production after a standstill due to the coronavirus disease (COVID-19) situation, in Torslanda, Gothenburg, Sweden April 17,2020. Adam Ihse/TT News Agency/via REUTERS ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. SWEDEN OUT. NO COMMERCIAL OR EDITORIAL SALES IN SWEDEN.
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The auto component industry is likely to see a lower contraction in revenue at 6-8 per cent for last fiscal as against earlier forecast of 12-15 per cent, aided by better-than-expected demand pick up across most of the sectors, a report said on Wednesday.

Passing of commodity prices and change in emission norms has also resulted in a 4-6 per cent increase in realisations, partly supporting revenue growth during H2 FY2021, rating agency Icra said in a release.

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The rebound in the current financial year is expected to be strong at 20-23 per cent, benefitting from demand pickup, the low base of FY2021 and the impact of commodity prices on realisations, it added.

Industry revenue collapsed by approximately 60 per cent Q1 FY2021, Icra said.

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Headwinds from disruption in automotive production due to supply chain constraints (primarily due to semi-conductor shortage globally) could play spoilsport in Q1 FY2022 and maybe even beyond, the agency noted.

Localised lockdown due to the recent spike in COVID-19 infections could also derail the growth momentum of the industry as footfalls to dealerships may shrink and remains monitorable, it said, adding the overall revenue CAGR during FY2020-2025 is likely to remain modest at 7-9 per cent.

Automobile production volumes during H2 FY2021 was significantly better than H1, capping the overall production volume decline for the fiscal.

The aftermarket segment also witnessed sequential recovery from Q2 FY2021, with the opening up of the economy, pent-up demand, delayed replacement of vehicles and festive season demand, Icra Vice President Ashish Modani said.

"We expect a flattish to low single-digit growth for the replacement segment in FY2021, and a 10-12 per cent increase in FY2022, partly arising from the commodity pass through.

"Supported by improved demand and additional financing support from banks, the liquidity position of most auto ancillaries has improved substantially from June-2020 levels, with many entities who availed moratorium benefits skipping restructuring proposals, despite eligibility," he said.

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With improved cash flows and easing liquidity position, Icra revised its credit outlook for the sector to 'Stable' from 'Negative' in Dec-2020. Strong growth across automotive segments is further likely to improve the credit profile of industry players in the coming quarters, he said.

According to Icra, the sharp V-shaped recovery is likely to cap the overall margin contraction for auto ancillaries (excluding-tyres) in FY2021 to 100-150 basis points. Entities heavily dependent on the M&HCV segment will be the most impacted and could witness a margin contraction of over 300 bps, whereas those catering to tractors, PV and 2W segments will be relatively better placed.

On the other hand, tyre manufacturers will register a multi-year high operating margin at over 15 per cent in FY2021 supported by favourable RM prices, it said.

Icra expects auto ancillaries (ex-tyres) to bounce back to pre-COVID (FY2020) margins in FY2022, benefitting from improved operating leverage, despite commodity headwinds.

"Our interaction with large auto component suppliers indicates a cautiously optimistic approach towards Capex/investment plans for FY2022, with most of these players awaiting clarity on government support for the production-linked incentive (PLI) scheme.

"ICRA research expects auto component suppliers to gradually increase their Capex/investment outlay in FY2022, though most of these investments will be largely funded by internal accruals," Modani said.

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First Published Date: 08 Apr 2021, 09:28 AM IST
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