Good news for auto component suppliers as they register growth this fiscal

Auto component suppliers are expected to log an 8-10 per cent growth in revenue this fiscal driven by healthy demand from domestic original equipment manufacturers (OEMs) and pent-up demand from the aftermarket, according to a report.

However, rating agency ICRA in the report said headwinds persist on the exports front for the auto component suppliers. For the first half of the current fiscal, the industry reported a year-on-year growth of 29 per cent, ICRA said on Monday, based on projections from 49 auto ancillaries with aggregate annual revenues of close to ₹3,00,000 crore. The export orders have slowed down in the last few months, impacted by inflationary pressures, geopolitical tensions, and supply-chain issues.

"Domestic original equipment manufacturer (OEM) demand constitutes almost 50 per cent of sales for the Indian auto component industry. This is likely to remain healthy in FY2023, with double-digit growth expected in both passenger vehicle and commercial vehicle segments," said Vinutaa S, Vice President and Sector Head at ICRA.

Further, according to ICRA, demand for public and private transport is expected to remain healthy with an increase in mobility, supported partly by the reopening of schools and offices. This, along with steady freight movement, is likely to aid replacement volumes in the near-term, among other factors, it stated.

Furthermore, select companies have also started witnessing a healthy ramp-up in revenues with a steadily rising share of EVs where content per vehicle is expected to rise considerably, it said and added that these trends will translate into healthy growth for auto component suppliers over the medium-to-long term. However, certain headwinds will persist, especially for companies with a high share of imports (owing to rupee depreciation vis-a-vis USD) and elevated cost of raw materials linked to crude oil derivatives, as per the report.

Aided by the benefits of operating leverage and easing commodity prices and supply chain disruptions, the auto part makers are also likely to see a 50-75 basis points improvement in operating margins in FY2023, with margins for the ex-tyre sample likely to return gradually to pre-COVID levels of 10.5-11 per cent, it said.

"While a gradual increase in usage of advanced components unavailable in India has contributed to import increases over the years, supply chain disruptions and domestic market recovery contributed to an increase in imports in FY2022," said Vinutaa.

The auto component imports in India stood at USD 18.3 billion in the previous fiscal, with China and Germany being the largest source markets, contributing 30 per cent and 11 per cent, respectively, in FY2022.

File photo used for representational purpose. (REUTERS)

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File photo used for representational purpose. (REUTERS)

While the depreciation of Indian Rupee against USD is a worry for net importers, forex hedging measures adopted and alternate local sources have mitigated the risk to an extent. In case of components unavailable in India, ancillaries are exploring alternate materials and localisation options as measures to mitigate forex and supply-chain risks going forward," Vinutaa added.

ICRA said its interaction with large auto component suppliers indicates a cautiously optimistic approach toward CAPEX/investment plans forFY2023. ICRA Research expects auto component suppliers to gradually increase their CAPEX/investment outlay to 6-6.5 per cent of operating income in FY2023 and 7-8 per cent in FY2024, though most of these investments will be largely funded by internal accruals.

The incremental investments will be primarily towards capability development-- new product additions, product development for committed platforms, and development of advanced technology and EV components, unlike the investments towards capacity expansion witnessed in the past, as per the report.

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