Auto Component Industry To See 20-23% Revenue Growth In FY2022: ICRA

The domestic auto component industry is expected to see 20-23% revenue growth in the current fiscal, strongly supported by recovery in domestic automobile industry and robust exports, most domestic automobile sub-segments, the PV, 2W and CV segments are expected to report healthy double-digit growth in FY2022 credit ratings agency ICRA said on Thursday. However, the sustained elevation of commodity prices and the shortage of semi-conductors remains a key concern for the industry.

The domestic auto component industry has witnessed smart recovery during the quarter ended June 2021 driven by strong exports and revival of domestic demand in June 2021. said ICRA in its report. The rating agency’s sample of 50 auto component suppliers witnessed a strong revenue growth of 140% Y-o-Y, albeit on a low base of Q1 FY2021.

Despite the Covid 2.0 restrictions, the overall decline in Q1 FY2022 was restricted to 19% on QoQ basis, in contrast to ICRA’s earlier estimate of QoQ decline of 30-35%.  Passenger-vehicle (PV) and tractors continue to witness strong demand and are almost at pre-covid levels. While the M&HCV segment, which was impacted during Q1 FY2022, is also now showing signs of recovery. Said ICRA in a statement.

“The passthrough of increase in commodity prices will also add to the revenue growth. The industry gross margins improved sequentially in Q1 FY2022, but remain lower than the historical trend. The shortage of semi-conductor and increase in commodity prices remain key challenges for the industry in the near-term.” said Ashish Modani, Sector Head and Vice President - Corporate Ratings, ICRA

The prices of key commodities which continues to remain at elevated level, despite some moderation in recent months remains to be one of the key concerns of the industry according to ICRA. Auto component suppliers usually pass on the impact of commodity price increases to OEMs with a lag of 1-2 quarters. As per the agency the recent trend also suggests that auto component suppliers have gradually passed on the hike in commodity prices to their customers, as reflected in the sequential improvement in gross margin. However, the gross margin remains lower than the normal levels (which were prevalent in FY2020) by 100 bps.

The shortage of semi-conductors remains another key concern for the industry. The automotive industry accounts for 11% of global semi-conductor demand. Stronger-than-expected recovery along with supply disruption at some semiconductor manufacturing facilities, has aggravated chip shortage issues globally. In India, many PV OEMs have acknowledged the impact on production volume due to semi-conductor shortage, with volume loss of 100,000 units in Q2 FY2022 (~3% of annual production) itself.

The supply bottleneck poses a major challenge to the industry with waiting period for few models/variants exceeding four months, though underlying demand remains strong. ICRA’s interaction with industry participants indicates that supply shortage is likely to continue at least till the end of CY2021, which will remain an overhang on industry’s revenue growth prospects. Nevertheless, the challenges faced by OEMs in India have been relatively limited due to lower semi-conductor-based components given the sales mix being skewed in favour of Class A&B cars. Further, OEMs have been trying to develop alternate sources, airlift material and pursue other innovative solutions to overcome the semiconductor supply issue, it added.

On the financial performance, while most auto component suppliers witnessed sequential decline in operating margin due to impact of Covid 2.0 on overall revenues, The industry’s coverage indicators continue to remain comfortable. Despite increase in interest expense and impact on operating profits, overall interest cover continues to remain comfortable for most auto component suppliers with ICRA at 11.0 times in Q1 FY2022 vis-à-vis 10.7 times in FY2021, it said.

ICRA expects that the overall credit metrics such as TD/OPBDIT for the sector will remain comfortable below 1.5 times in FY2022e aided by healthy accruals and modest capex plans.