Indian Auto Component Industry Is Expected To See A 20-23% Growth In FY2022: ICRA

The Indian auto component industry is expected to report a 20-23% revenue growth in FY2022, supported by strong exports demand, and recovery in domestic OE and aftermarket segments. The growth would come in on the low base of last two fiscals and will look optically strong because of the exceptionally weak H1 FY2021. The industry has bounced back handsomely during the second half of last fiscal, with many auto component suppliers registering record revenue and profits during Q4 FY2021. Exports, which accounts for 29% of Industry’s turnover, also witnessed healthy recovery, supported by strong traction in key target markets i.e. USA and Europe. Given strong rebound in the US Class 8 truck market and large infrastructure investments expected, exports are likely to remain a bright star for the industry in the near term. Chip shortages, slow vaccination roll-out in some regions, logistics challenges and further lockdowns/curfews, if any, could be demand dampeners going forward.

Says Ashish Modani, Vice President and Sector Head, ICRA Limited, “The Covid 2.0 applied temporary brake on the auto component industry’s recovery prospects in Q1 FY2022. The aftermarket sales were also impacted for close to 4-6 weeks, because of the curfews/lockdowns and closure of workshops. The industry’s revenues declined by 30%-40% on a Q-o-Q basis, despite support from exports. While the Q-o-Q decline was relatively sharp, revenues were more than double of Q1 FY2021 levels. For the full year FY2022, we expect a revenue growth of 20-23% aided by growth across segments and commodity pass through, albeit on a low base. However, headwinds such as sharp increase in commodity prices, supply chain disruptions partly arising from semi-conductor shortage and premium freight expenses are expected to weigh in industry margins in FY2022, partially offsetting benefits arising from improved operating leverage.”

Commodity prices are expected to remain at multi-year highs in H1 FY2022 (resulting in multi-year high average in FY2022), before softening in H2 FY2022. Also, the semiconductor shortage remains a challenge for the automotive industry and is expected to result in supply chain disruptions. An increase in air freighting, resulting in higher freight costs for the industry, also remains a challenge. Despite the strong revenue growth and consequent benefits from operating leverage expected, these headwinds are expected to weigh in on margins. In the backdrop of soft commodity prices, tyre companies witnessed a multi-year high operating margin in FY2021, which will moderate to 13-14% level over the medium term. The operating margin of auto component suppliers (ex-tyres) is likely to witness YoY improvement of 50-75 bps in FY2022 due to operating leverage benefits, though the sharp increase in commodity prices will keep overall margin expansion under check. 

“We expect the credit profile and liquidity position of auto ancillaries to remain largely stable in FY2022. Interest coverage of our sample of 50 auto component suppliers is likely to increase to 9-10 times in FY2022 from 8-8.5 times in FY2021. Our interaction with large auto component suppliers indicates a cautiously optimistic approach towards capex plans for FY2022, with investments expected to be largely funded by internal accruals. The incremental investments will be primarily towards capability development i.e. new product additions and committed platforms, unlike the investments towards capacity expansion witnessed in the past”, adds Modani.