Fiscal year 2017-18 bids fair to be a very good one for the overall Indian automobile industry and in turn, the automotive component sector. As per the latest sales results, OEMs across segments have reported robust sales numbers in February 2018.
The demand for components from domestic original equipment manufacturers (OEMs), especially the high-volume two-wheeler (2W) and passenger-vehicle (PV) industry, which together constitute about two-third of overall ancillary industry size, has remained strong in Q3FY2018. Moreover, stellar growth in commercial vehicles (CVs) as well as the tractor segment has further supported overall volume growth.
According to ratings agency ICRA, given the indicative trends, the growth momentum is expected to sustain in Q4FY2018 as well. This will be strongly supported by improved demand outlook in key end user segments as well as expected pickup in rural income. Going forward, pickup in infrastructure activity will further drive growth in construction & mining equipment as well as the tipper segment (classified under M&HCVs).
In FY2016-17, the Indian auto component industry showed healthy growth of 14.3 percent posting Rs. 29, 2184 crore (US$ 43.5 billion) turnover. While exports showed a growth of 3.1 percent scaling to Rs 73,128 crore (US$ 10.9 billion) in FY 2016-17. The aftermarket grew by 25.6 percent to Rs. 56,096 crore (US$ 8.4 billion) from Rs 44,660 crore (US$ 6.8 billion) in the previous fiscal.
According to Subrata Ray, senior Group VP, Corporate Sector ratings, ICRA, “During Q3FY2018, auto component vendors dependent on the CV and two-wheeler segment witnessed double- digit growth in volume, which along with improved realisation due to increase in commodity prices resulted in strong revenue growth. However, while domestic PV demand remained strong, muted PV exports has dragged overall PV production volume growth during the last two quarters. We expect PV exports-related aberration to abate during the coming quarters, and it will be more than offset by robust demand momentum in domestic market, effectively supporting auto component demand.”
Significant exports from India
With 25% contribution to the overall, auto components exports from India remain significant. The USA and EU markets together account for 60% of total auto component exports from India.
With the US heavy commercial vehicle (HCV), especially class-8 trucks witnessing strong order inflow (+49.7% Y-o-Y) during CY2017, the benefits of improved order inflow have already started accruing to component suppliers for US HCV market. Consequently, exports to the USA CV space are expected to grow over the near term. The European PV and CV registration numbers too have witnessed marginal growth in CY2017; however the outlook for this geography is relatively muted.
ICRA’s sample of 48 auto ancillaries, comprising around 26% of the industry’s turnover, grew 18.5% revenue-wise during Q3 FY2018. The same appeared stronger on the low base of last fiscal, where overall performance was impacted by demonetisation. Overall, during 9MFY2018, the sample space grew by 12.3% which was better than the earlier 9%-11% growth estimate for FY2018e. Given strong revenue growth the growth estimates have been revised upward for FY2018e to 13-15%.
Though rising commodity prices trends over the last 4-5 quarters have pressurised profitability of auto ancillaries due to Y-o-Y increase in RM expenses, most players have been able to offset the commodity pressure by improved operating leverage benefits.
Over the last two quarters, vendors dependent on M&HCVs and 2Ws have performed well with most of them registering double-digit growth in revenue. Several auto ancillaries, especially those dependent on steel have also witnessed Y-o-Y decline in raw-material cost during Q3FY2018, due to range bound steel prices over last 2-3 quarters and ancillaries ability to pass on price escalation to its customer (OEMs) in the interim. Overall, OPM of sample space expanded by 41bps Y-o-Y to 14.1% primarily driven by improved operating leverage. Over the same period, OPM of tyre companies in ICRA’s sample declined by 37bps Y-o-Y which was more than offset by 73bps expansion in OPM of non-tyre companies.
The ratings agency expects industry-wide credit 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. This, despite the fact that the industry has been on a consolidation mode over the last two years, taking steps towards deleveraging their balance sheet, given the surplus capacity.
However, select OEMs are exploring inorganic growth opportunities in India as well as in overseas market to support growth as well as diversify its clientele and product portfolio. Ancillaries continue to focus towards 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 existing capacity. A few companies have started investing keeping in mind the requirements for BS VI (in 2020), CAFE norms and electric vehicles in 2030.
ICRA revises industry growth outlook
According to Ray, “ICRA research has revised upward its revenue growth estimate from 9-11% to 13-15% for FY2018e in the backdrop of robust growth expectation in the domestic PV, CV, tractor and 2W segment. Revenue growth will be also supported by steady increase in the commodity prices and consequent impact on the realisation. Considering the increasing content per vehicle due to various technological advancement 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. The revenue growth of auto ancilliaries is expected to be at 11-13% for FY201e, given healthy growth expected across key automotive sub-segments as well as commodity price impact on realisation. We maintain our 10-12% long term (5 year) CAGR expectation for Indian auto component industry.”
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, operating margin dipped below 15% level during FY2017 and it is likely to moderate further in FY2018. The same is expected to be ~13%-13.5% in the medium term as compared to earlier sub-12% level witnessed prior to FY2012 owing to a richer product mix and rising revenues from the profitable aftermarket segment.