Auto component industry’s revenues to grow by 5-8% in FY2024, despite export headwinds: ICRA

ICRA projects its sample of 44 auto ancillaries with aggregate annual revenues of over Rs 2,50,000 crore to grow by 5-8 percent in FY2024, driven by healthy domestic demand, despite a high base and weak export environment. 

The rating agency expects electric vehicle opportunities, premiumisation of vehicles, focus on localisation, improved export potential, and regulatory norms changes to translate into healthy growth for auto component suppliers over the medium to long term.

For 9 months of FY2023, ICRA’s sample reported robust revenue growth of 26 percent on a YoY basis. Aided by the benefits of operating leverage, increase in content per vehicle, easing of cost pressures, and improvement in the supply-chain scenario, the rating agency expects YoY improvement of 100-150 bps in operating margins in FY2024 with the same returning to pre-Covid levels of 11-11.5 percent.

That said, certain headwinds will continue to persist, especially for companies that have a high share of imports, because of the forex volatility. For 9 months of FY2023, the operating margin for the sample set stood at 10.0 percent, about 30 basis points lower on a YoY basis.

Vinutaa S, Vice President and Sector Head – Corporate Ratings, ICRA said, "Domestic OEM demand constitutes almost 50 percent of sales for the Indian auto component industry. This is likely to remain healthy in FY2024, with high single-digit growth expected across segments except for tractors. Further, the replacement demand is expected to remain stable in FY2024, growing at 6-8 percent, supported by underlying demand drivers, including an increase in mobility, improving economic activity, and healthy freight movement." 

She further added that the export orders have slowed down in the last few months and are likely to remain weak in H1 FY2024, impacted by economic gloom, geopolitical tensions, and supply-chain issues. However, ancillaries will benefit from supplies to new platforms because of vendor diversification initiatives by global original equipment manufacturers. 

Cost inflation continues to be a key headwind for the industry. While costs have eased on a sequential basis in the last few months, they remain at elevated levels. While gross margins for ICRA’s sample improved in Q3 FY2023 on QoQ basis, the upside was limited.

Ancillaries are looking at enhancement of product portfolio and increased value addition/content per vehicle.  Further, companies have adopted consolidation of delivery and optimisation of routes to the extent possible, to reduce freight expenses. Increased usage of power from renewable sources, usage of energy-efficient machinery, factoring arrangements to reduce working capital requirements, and other measures like improvement in output per employee through automation/technology enhancement is likely to support margins going forward,” Vinutaa added.

Imports are an integral part of the auto component industry, especially with the increase in electronics and advanced technology components. While the gradual increase in usage of advanced components that are unavailable in India has contributed to import increase over the years, supply chain disruptions and domestic market recovery contributed to an increase in imports in the last 12-18 months.

While forex volatility is a worry for net importers, forex hedging measures adopted and alternate local sources have mitigated the risk to an extent. In the case of components that are unavailable in India, ancillaries are exploring alternate materials and localisation options as measures to mitigate forex and supply-chain risks going forward.

The industry liquidity position remains comfortable, especially across tier-I players. ICRA expects coverage metrics for the sector to remain comfortable going forward as well, aided by healthy accruals and relatively low incremental debt funding despite an increase in the cost of borrowings. Most auto ancillaries rated by ICRA are in investment grade, reflecting a healthy credit profile stemming from healthy cash accruals and relatively low debt levels. 

On the investments by auto component suppliers, Vinutaa says, “ICRA’s interaction with large auto component suppliers indicates that the expected demand uptick and technological changes would result in a capex upcycle in FY2024."

She further added that the industry is expected to incur capex of over Rs 20,000 crore in FY2024, with incremental investments being towards new product additions, product development for committed platforms, and development of advanced technology and EV components, apart from capex for capacity enhancements and upcoming regulatory changes.

The recently announced PLI scheme will also contribute to accelerating capex over the medium-term besides investments by new entrants in the EV segment.