Components sector focusing on internal costs controls as demand falls: ICRA

July 23, 2013: After studying 35 listed component manufacturers, ratings agency ICRA has said that over the near term, it expects the Indian auto component industry’s revenue growth to remain weak due to the absence of immediate demand triggers for end-users across local segments and an uncertain global economic environment that would exert pressure on export volumes

Over the medium term, however, factors such as auto OEMs’ growing thrust on localisation, efforts to expand business in new geographies, the strong upside potential to replacement demand and increasing sophistication of vehicles shoring up part prices, should allow the Indian auto components industry to grow at a relatively faster pace than the auto OEM segment.

The Indian auto components industry’s revenue growth in 2012-13 was the slowest in last five years as suppliers had to tackle weak demand from domestic OEMs, sluggish export volumes starting Q2 2012-13 and tepid replacement market sales. Revenue growth (YoY) was particularly weak in Q4 of 2012-13 due to the unusually high base of Q4 2011-12 (due to vehicle pre-buying that takes place n this period in anticipation of excise duty hike) as well as demand weakness across all automobile segments.

Suppliers of parts to the medium and heavy commercial vehicle (M&HCV) segment and the passenger car (PC) segment were the most severely impacted, while suppliers to the light commercial vehicle (LCV) and utility vehicle segments were relatively better off.

As per ICRA’s study sample (35 publicly-listed auto component manufacturers) the average revenue growth of these select entities (during the last eight quarters) has been steadily declining with YoY growth being lower in each passing quarter since Q1 2011-12 and turning negative for the first time in Q4 2012-13. Nevertheless, there were notable exceptions with the revenue growth of select auto component manufacturers being much higher than the industry’s on the back of market share gains, favourable change in model mix, rise in content per vehicle, besides revenue accretion due to corporate actions such as acquisitions and amalgamations.

While revenue growth and operating profit growth of auto components industry came under pressure in 2012-13, operating profit (OPBDIT) margins of industry participants in the study sample stayed relatively stable. However, the observed aggregate margin stability shrouded the wide disparity in profitability evident across suppliers.

The margins of suppliers dependent on the M&HCV segment bore the biggest brunt in 2012-13 as weak demand impacted the potential gains that could have arisen from a relatively benign raw material cost environment. Also, many suppliers in the ICRA sample had their margins affected in 2012-13 due to escalation in other overheads including employee costs and power costs, besides costlier imports due to depreciation of the Indian currency.