ICRA: Outlook On Auto component Sector Revised To ‘Negative’

ICRA has revised its sector outlook on auto components to Negative, following the sharp and broad-based contraction in OEM sales in the past several quarters. Aftermarket demand for components, which accounts for 18% of the industry turnover has also slowed down with the decline in goods movement and the consequent weakness in freight activity. Further, tight liquidity across the aftermarket dealer channel has led to de-stocking, curtailing fresh demand from component manufacturers. Given that the global automotive outlook has turned negative with a decline in sales across geographies, partly due to heightened trade tensions and other geopolitical factors, export demand for Indian component manufacturers could be impacted in the coming quarters.

Says Subrata Ray, Senior Group Vice President & Head – Corporate Sector Ratings, ICRA, “Despite accommodative commodity prices, weakness in OEM demand will impact credit metrics for component manufacturers. This comes amidst rapid and mandatory technological advancements in vehicle safety and emissions, which has led to sizable capital expenditure by component manufacturers over the past few years.”

Over the last several years, the auto supplier industry has benefited from the volume growth across segments, enjoying healthy cash flows stemming from scale benefits and higher value additions. Nevertheless, the impact and the ability to tide over the current slowdown will depend on the credit profile of individual entities heading into the downcycle.

Large tier 1 manufacturers, who have used their cashflows from the upcycle to develop a strong balance sheet and product capabilities are expected to be more resilient to the current downturn. On the other hand, entities with a leveraged balance sheet are likely to face stress. Smaller players, especially Tier II/III players will feel the pressure more acutely as they lack pricing power and bear the brunt of stretched work capital cycle.

“Most players in the auto component sector is taking a relook at their capital expenditure plans; consequently, across segments, ICRA estimates a cut back ranging between 15-25% by most players”, added Ray.