OEM and replacement demand, changing norms to benefit suppliers in FY2020

Ratings agency India Ratings and Research (Ind-Ra) has maintained a stable outlook for the auto ancillaries sector for FY2020, based on the expectations of moderate demand from original equipment manufacturers (OEMs), a continued replacement demand and a likely rise in content per vehicle amid evolving regulatory norms.

The agency expects moderate sales volume growth in the passenger vehicle segment, high single-to-low double-digit growth in the commercial vehicle segment and steady growth in the two-wheeler segment in FY2020 on a year-on-year basis. Furthermore, the adoption of new safety and emission norms, technological advancements along with a trend towards premiumisation and digitalisation are likely to increase the content of auto components per vehicle, thus driving growth among auto ancillaries.

Auto ancillaries would be looking at increasing their capacities to cater to the new regulatory norms and higher replacement demand. Ind-Ra thus expects the credit metrics to moderate in FY2020; however, adequate cash flows and healthy balance sheets are likely to give comfort. Also, although margins in the sector will remain sensitive to raw material prices and forex volatility, the economies of scale and ability of major suppliers to partly pass on price rises to OEMs will keep margins stable. 

The ratings agency expects the sector companies to embrace inorganic growth in the medium to long term.

FY2020 Outlook
Tyres: Credit metrics to deteriorate over FY2019-FY2021, amid high expansionary capex though there is sufficient replacement demand over the next five years to absorb new capacities.

Forgings: Revenue growth to normalise in line with slower growth in domestic commercial vehicles and US truck sales compared to last year’s.

Battery: Players eyeing to capture lithium-ion opportunity. New product development, technology upgradation and capacity addition capex likely over the next two to three years.

Diesel engines: Capex will come down in FY2020 as Bharat Stage VI-related capex will peak out. Companies will continue to diversify in other fuel-agnostic products.