The Rs. 2.90 trillion (FY2017) domestic auto component industry is expected to grow by 9-11% during FY2018, driven by the expected robust growth in the passenger vehicle and two-wheeler segments. As per an ICRA study, after considering the increasing content per vehicle due to various technological advancements 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% during Q2 FY2018. 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 H1 FY2018, the sample space grew by 9.5% which is in line with 9-11% growth estimate for FY2018.
Says Mr. Subrata Ray, Senior Vice President and Group Head, Corporate Sector ratings, ICRA: “Domestic original equipment manufacturers (OEMs), especially the 2W and PV industries, which together constitute about two-third of the overall domestic OEM demand, is expected to grow at a healthy pace in FY2018. Moreover, the expected recovery in rural income will provide upside for sub-segments like light commercial vehicles (LCVs), motorcycles and tractors. Though PV exports indicate some aberration and thereby have some bearing on production volumes, domestic PV demand remains strong during Q2FY2018. Exports-related aberration is likely to abate during the coming quarters and will be more than offset by robust domestic demand. As regards medium & heavy commercial vehicles (M&HCVs), their Q1FY2018 demand slowdown affected ancillaries’ performance, but strong double-digit growth during Q2FY2018 has resulted in superior performance of ancillaries. Going forward, pick-up in infrastructure activity will further drive growth in construction & mining equipment as well as the tipper segment (classified under M&HCVs).”
Exports which account for 28% of the industry demand, with the US 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 rupee appreciation
Commodity prices have been rising over the last four-five 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 the 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 an 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 the 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 industry.
Incremental investments by auto ancillaries are primarily towards new order/platform-related requirement or debottlenecking of the existing capacity. A few have started investing keeping in mind the requirements for BS-VI (in 2020), CAFE norms and electric vehicles in 2030.
“Over the medium to long term, growth in the auto component industry will be higher than the underlying automotive industry growth, given the increasing localisation by OEMs, higher component content per vehicle and rising exports from India. In line with ICRA’s previous forecast, OPMs dipped below the 15% level during FY2017 and it is likely to moderate further in FY2018. Nevertheless we maintain our medium-term margin outlook of ~13-13.5% as compared to the earlier sub-12% level witnessed prior to FY2012 owing to a richer product mix and rising revenues from the profitable aftermarket segment. We maintain our 10-12% long term (5 year) CAGR expectation for the Indian auto component industry,” concludes Mr. Ray.