Investment and credit rating agency ICRA says the automotive component industry in India will clock a growth of 5-8 percent in FY2024, despite the challenging export situation.
The projection is based on its study of 44 auto ancillaries with aggregate annual revenues of over Rs 250,000 crore, with the growth primarily driven by healthy domestic demand, despite a high base and weak export environment. It expects electrification 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.
In the first nine months of FY2023, ICRA
The rating agency expects a YoY improvement of 100-150 bps in operating margins in FY2024 with the same returning to pre-Covid levels of 11-11.5 percent. But “certain headwinds will continue to persist, especially for companies that have a high share of imports, because of the forex volatility.”
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. Discouragingly, 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 OEMs,” added Vinutaa.
Localisation and alternate materials being explored due to forex volatility
The rating agency says cost inflation continues to be a key headwind for the auto component industry. While costs have eased on a sequential basis in the last few months, it remains at elevated levels.
Vinutaa added that ancillaries are looking at the enhancement of product portfolio and increasing value addition/content per vehicle. Companies have also adopted consolidation of delivery and optimisation of routes to the extent possible to reduce freight expenses.
She finds that 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 will likely support margins going forward.
It is a well-known fact that 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.
On the other hand, forex volatility is a worry for net importers, but forex hedging measures adopted and alternate local sources have mitigated the risk to an extent. ICRA says 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.
Rs 20,000 crore Capex planned by component makers
On the investments by auto component suppliers, Vinutaa stated that ICRA’s interaction with large auto component suppliers indicates that they expected demand uptick and technological changes would result in a Capex upcycle in FY2024.
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, 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,” concluded Vinutaa.