ICRA expects the Indian auto component industry to gain momentum and register a growth of 8-10 per cent in the next fiscal (FY2017). M&HCV demand is likely to stay robust but slow down to 13-15 per cent given the increased base of FY2016. The recent ban on diesel vehicles in NCR and the additional levy of 1-4 per cent infrastructure cess on passenger vehicles in the Union Budget will impact the overall demand momentum in the PV segment which accounts for bulk of the domestic OE demand for auto components.
Over the medium to long term, growth in the auto component industry will be higher than the underlying automotive industry growth given the increasing localization by OEMs, higher component content per vehicle and rising exports from India, says ICRA in its latest research update on the auto component industry.
Overall demand from the OE and export segments remained subdued in FY2016 though some support from aftermarket sales drove overall auto component growth of 3-5 per cent.
While export demand was weak during FY2016, robust demand for passenger vehicles in North America as well as Europe is likely to offset the decline in the M&HCV segment in those markets over the next 9-12 months.
Mr. Subrata Ray, Senior Group Vice President, Corporate Ratings, says: “Over the medium term, ICRA expects the OPBDIT margin for the auto component industry to stabilize at the 14-14.5 per cent level, given expected bottoming out of commodity prices in the current year. In FY2017, rural demand (impacting motorcycles, tractors and passenger vehicle segments) will be contingent on monsoon, though Government efforts in the Union Budget of FY2017 could benefit the rural economy,” he adds.
With anti-locking braking system (ABS) becoming mandatory in 125cc+ two-wheelers from April 2018, the domestic ABS market will witness exponential growth. Also, increasing awareness regarding safety aspects and the likely implementation of the mandatory crash test for passenger vehicles will further drive demand for ABS in passenger vehicles. International players like Bosch and Continental as well as home-grown majors like Brakes India will be the key beneficiaries of the mandatory implementation of ABS for 2W and PVs. At present, ICRA estimates ABS penetration of 30 per cent in the PV segment and minimal (<5%) in the two-wheeler segment. The ABS market could turn out to be a Rs. 6,500-crore opportunity for suppliers by FY2019 in the backdrop of implementation of safety regulations.
Given the demand slowdown and surplus capacities, the industry has been in a consolidation mode over the last two years, taking steps towards deleveraging their balance sheet. Gearing level as well as coverage indicators for the industry has improved considerably over the past 12-15 months, and ICRA expects industry-wide credit trends to remain stable, supported by demand from the OEM and replacement segment in the near term.