The West Asia conflict is expected to dent the profitability of the domestic auto component sector, with operating margins likely to soften to 10.5–11% in FY27 from around 12% last year amid rising raw material and freight costs, Crisil Ratings said on Wednesday.
Raw materials account for nearly three-fourths of the sector’s total cost, with steel and aluminium together comprising 50–60% of input expenses. Both commodities have witnessed sharp price increases in recent months. Despite the cost pressures, Crisil expects the sector’s revenue to grow 9–11% this fiscal, helping stabilise absolute operating profits even as margins narrow.
Demand from original equipment manufacturers (OEMs), which contribute more than two-thirds of sector revenues, is expected to remain steady. New passenger vehicle launches, infrastructure-linked commercial vehicle activity, continued premiumisation in the two-wheeler segment, and rising electric vehicle (EV) adoption are expected to support demand. The aftermarket segment also remains stable, backed by a large installed base of vehicles sold in previous years.
Anuj Sethi, senior director at Crisil Ratings said that the raw materials, employee expenses and power make up approximately 90% of the sector’s overall cost structure. “Input and energy prices have risen, with minimum wage revisions across several states adding further pressure,” Sethi said.
“OEMs typically offer a cost pass-through, though with a lag of one to two quarters and not always in full, thus moderating operating margins,” he added.
The primary revenue driver for the industry remains domestic OEM demand, which has sustained momentum following last year’s Goods and Services Tax (GST) rate reduction. Sector tailwinds include a steady pipeline of new passenger vehicle launches, rising infrastructure-linked commercial vehicle activity, continued premiumisation in the two-wheeler market, and accelerating EV adoption across segments.
The aftermarket segment remains stable, supported by the large stock of vehicles on the road. Meanwhile, export revenues are projected to grow 8–9% year-on-year. The growth is expected to be aided by tariff corrections in the United States, the sector’s largest export market, even as longer shipping routes around West Asia increase overall lead times.
The conflict is also reshaping supply chain dynamics. Manufacturers are increasing buffer stocks to safeguard production schedules amid global uncertainty, which is likely to raise inventory levels by 15–20 days from the current 80–85 days. Larger players are expected to be better placed to manage the resulting working capital pressures, given their scale and stronger bargaining power with suppliers and creditors.
On the capital expenditure front, Crisil-rated auto component players are expected to invest around ₹27,000 crore this fiscal, up about 10% year-on-year, primarily towards capacity expansion, including EV-related components. The aggregate interest coverage ratio is projected at around seven times, while debt-to-EBITDA is expected at 1.5–1.7 times, indicating moderate leverage and adequate balance sheet strength.
Crisil said the duration of the West Asia conflict, the pace of normalisation in energy and freight costs, commodity price movements, and the timing and extent of cost pass-throughs to OEMs will remain key factors to watch over the coming quarters.