The automotive components sector is expected to record moderation in revenue growth to 6-8 per cent this fiscal and the next, after clocking around 14 per cent increase last fiscal, stated a report by CRISIL Ratings. This, it added, will be on the back of decelerating demand for new vehicles barring two-wheelers.
Additionally, exports are expected to grow at a slower rate than the 13 per cent seen in fiscal 2024 as the macroeconomic environment in key markets abroad remain sluggish. However, steady replacement demand, the report said, will support ongoing growth.
Despite slower growth, the operating profitability of auto component makers should sustain at 12-13 per cent this fiscal and the next due to better realisations and cost reduction initiatives.
Aligning with the trend seen in the automobile original equipment manufacturer (OEM) sector where passenger vehicle (PV) players are adding capacity over the next 3-4 years, capital spending is expected to rise. However, much of this capital expenditure (capex) will be funded through healthy cash generation, with limited reliance on debt, keeping credit profiles stable, CRISIL Ratings stated.
CRISIL Ratings analysed automotive component makers accounting for nearly 35 per cent of sector revenue of approximately Rs 7 lakh crore last fiscal, to release the findings of the report.
Automobile OEMs typically contribute 65-70 per cent to the total revenue of automotive component manufacturers, and exports and replacement demand account for the balance. Among OEMs, PV and two-wheeler segments account for close to three-fourths of the revenue.
Anuj Sethi, Senior Director, CRISIL Ratings, said, “Demand from two-wheeler OEMs is expected to show double-digit growth this fiscal and the next, while other OEM segments may witness modest demand, limiting overall OEM growth. The replacement segment should sustain 8-9 per cent revenue growth, bolstered by strong automobile sales from previous years. However, the challenging macroeconomic scenario in key export destinations such as Europe and the US has led to a slowdown in export revenue growth.”
Exports, the report said, are vital, and it currently constitutes around 15 per cent of total revenue, down from about 17 per cent in fiscal 2022. Although export growth is slowing, India’s increasing share of high-margin, critical components — accounting for around 60 per cent of export revenue in fiscal 2024 — will support profitability.
Besides, cost optimisation and moderate realisation growth driven by premiumisation in PV and two-wheelers, along with advanced electric vehicles (EVs) components, will support sector profitability at 12-13 per cent. Currently, a considerable portion of EV components are imported from China and other countries.
Poonam Upadhyay, Director, CRISIL Ratings, said, “With the anticipated rise in EV adoption, companies are gradually investing in capacities for EV-related components. Additionally, commitments to the PLI scheme and increased spending by OEMs are likely to elevate the capex of automotive component manufacturers. Companies rated by us are expected to invest ~Rs 16,500 crore each in the current and next fiscals, marking a 25 per cent increase from fiscal 2024. Nevertheless, healthy balance sheets and cash flows will limit reliance on external borrowing, ensuring debt protection metrics remain comfortable.”
Key debt protection metrics are expected to be comfortable, with interest coverage and ratio of debt to EBITDA expected at 8-9 times and 1.1-1.3 times, respectively, in the next two fiscals, compared with 7.5 times and 1.6 times, respectively, last fiscal. That said, CRISIL concluded, factors such as OEM demand, pace of EV adoption and the global macroeconomic situation will bear watching.