The Rs 2.90 trillion (FY2017)
domestic auto component industry is expected to grow by 9-11% during FY2018,
driven by robust growth expectation in domestic passenger vehicles (PV)s and
two wheelers (2W) segment.
As per an ICRA note, after
considering the increasing content per vehicle due to various technological
advancement as well as regulatory measures (emission, safety regulations), the
growth in the auto component industry will be relatively higher than the
underlying growth in the automotive industry in the medium to long term.
ICRA’s sample of 48 auto
ancillaries, constituting around 25% of the industry’s turnover, witnessed
revenue growth of about 13.5% (revenue) during Q2 FY2018e. The same was driven
by higher realization in the backdrop of steady increase in commodity prices,
whereas volumetric growth was in the mid-single digit. Overall, during
H1FY2018, the sample space grew by 9.5% which is in line with 9%-11% growth estimate
Exports which accounts for 28%
of industry’s demand, with USA and Europe making up for 60%, witnessed a decline. This was sharper in the
US M&HCV market during H2 CY2015 and CY2016. However, the trend seems somewhat
reversed now with incremental order inflow for class-8 trucks being encouraging
over the last six months. As for European markets, new PV and CV registration
numbers have witnessed marginal growth YTD CY2017 and their growth outlook
remains tepid over the near to medium term. Exports will also be affected by
Commodity prices have been
rising over the last 4-5 quarters, thereby pressurising industry’s
profitability. Amongst all ancillaries, tyre manufacturers were the worst
impacted due to sharp volatility in rubber prices which has peaked around Rs
160/Kg in Q4FY2017, though it subsequently moderated to around Rs 130/Kg level
at present. Easing rubber prices has helped operating margins to recover during
Q2FY2018 after a five year low level during Q1FY2018. Other commodities like
steel and lead also remained at elevated level and continued to pressurize
profitability of players. Nevertheless, strong revenue growth during Q2FY2018
has offset some impact of commodity price pressure. Though overall OPM continues
to remain lower than last year’s level, most auto ancillaries have witnessed
sequential improvement in operating margins.
ICRA expects industry-wide
credit profile trends to remain stable, supported by robust demand from the OEM
segment in the near term. Supported by healthy cash accruals, gearing as well
as coverage indicators for the industry have improved considerably over the
past two years. However given surplus capacities, the industry has been on a
consolidation mode over the last two years, taking steps towards deleveraging
their balance sheet. With select OEMs exploring inorganic growth opportunities
in India as well as in overseas market to support growth, as well as to
diversify its clientele and product portfolio, some incremental leverage may be
expected. Overall ancillaries are concentrated on moving up the value chain to
mitigate profitability and competitive pressure in the intensely competitive
Incremental investments by
auto ancillaries are primarily towards new order/platform related requirement
or debottlenecking of existing capacity. Few have started investing keeping in
mind the requirements for BS VI (in 2020), CAFE norms and electric vehicles in
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