Over the medium term, operating margins are expected to stabilise at around 13.5-14% level, given bottoming out of commodity prices in the current year.
Indian auto-component industry is likely to gain momentum and register a growth of 10% in the current fiscal (FY17) as against 2.8% during FY16, with some traction in the passenger vehicle (PV) and motorcycle segments, according to ICRA.
Over the medium to long term, growth in the auto component industry will be higher than the underlying automotive industry growth, given the increasing localisation by OEMs, higher component content per vehicle and rising exports from India, said ICRA in its latest update note on auto component industry. Over the medium term, operating margins are expected to stabilise at around 13.5-14% level, given bottoming out of commodity prices in the current year.
“In our views, implementation of the 7th Pay Commission is expected to support urban/semi-urban segments like PV and scooter, whereas rural demand will be driven by expected above-average monsoon. In exports, robust demand for PV in North America as well as Europe is likely to offset expected decline in the M&HCV segment in those markets. Relatively better OE and exports demand, coupled with stable aftermarket demand, likely to drive overall auto component industry growth,” said Subrata Ray, senior vice-president, co-head, ICRA.
Given subdued demand and surplus capacities, the industry has been in a consolidation mode over the last two years, taking steps towards deleveraging their balance sheet. With industry participants, companies are focusing towards higher value-added products, which provide a cushion to the overall profitability during a downturn and also insulate them from cut-throat competition in the commoditised segments.
It industry-wide credit trends are likely to remain stable, supported by robust demand from the OEM segment in the near term.Overall, operating margin improved by 90bps Y-o-Y to 15.5%, though it has remained flattish Q-o-Q. ICRA estimates operating margins to have peaked out in FY2016 and to moderate going forward.