A recent report by ICICI Securities indicates that the growth outlook for auto component makers stays intact despite macro adversities in CY2022. Benign production levels in CY2021 coupled with improving semiconductor supply is also expected to help industry to report growth.
Revenue growth outlook for most of the major auto component makers is seen clocking a 10-12 percent YoY growth for this calendar year. This is despite adversities in form of recession fears, drought, and supply-chain issues impacting demand estimates.
Even for the April-June quarter, the ICICI Securities study shows that revenue was up 5 percent YoY for majority of the players amidst tepid demand due to China lockdown and chip supply issues.
EBITDA margin during the April-June quarter was down 250bps YoY on an average owing to elevated input commodity costs and increase in container/power rates. These prices have also seen considerable cool-off in recent times.
EBITDA margin outlook for CY2022 on an average signifies 100bps improvement YoY despite weak margin performance in H1.
As a result, the report reiterates that all this implies a possible improvement in pricing in tandem with falling commodity / container / power costs. According to ICICI Securities, key Indian auto component makers, with significant revenue dependence on overseas markets, have also been facing similar business situations. Therefore, the outlook for them too signifies a stronger H2FY2023 amidst adverse global macros.
In H1CY22, global light vehicle production was impacted by Chinese lockdown, supply chain issues and shortage of semiconductors, with average production in key markets falling 10% YoY. As per post-result outlook on CY2022 for leading auto component makers globally, the expected revenue growth for their Indian counterparts is still 10% YoY, implying a strong H2FY2023 driven by improvement in semiconductor supply.
It expects tepid inventory conditions would brighten the production growth outlook aided by rising semiconductor supply in the coming months. Diversification of revenue towards new products, addition of EV-dedicated components and shutting down of smaller suppliers amidst extreme cost inflationare seen helping the bigger players to outperform the component industry volume growth.
Also, as per ICICI Securities, increase in pricing to pass on current input cost inflation will help achieve the targeted revenue growth. The outlook of 50-100bps improvement in profitability for the same companies in CY2022, implies price hikes in the offing, benefits of raw material cost reduction and improvement in scale is also expected to kick-in.
One of the key upside risks as per ICICI Securities at the moment includes major decline in input commodity prices, crude oil prices falling below $80/bbl. However, continued pressure on semiconductor supply, worsening of the geopolitical situation, return of inflation in input commodity prices could be the primary headwinds to watch out for.
