ICRA revises outlook for auto parts industry to ‘stable’ on vehicle sales rebound

Rating agency ICRA has revised the outlook for the auto component industry to stable, from negative, with the revival of demand across original equipment manufacturers (OEMs), replacements and exports.

OEMs, which account for over 56% of the demand for auto components, have recorded a sharp increase in demand since September 2020 across all segments barring the medium and heavy commercial vehicle (M&HCV) segment, ICRA said in a release.

However, it mentioned that the M&HCV demand has also bottomed out and increased in Q3 FY2021.

“Thriving demand from the rural markets across the country has supported the demand for two-wheelers and tractors. ICRA has a Stable credit outlook on the tractor, two-wheeler and passenger vehicle industries. The credit outlook for the passenger vehicle industry has been revised to Stable, from Negative, in December 2020,” the rating agency said.

The aftermarket demand for components, which account for 18% of the industry turnover, has also picked up during Q2-Q3 of FY21 after a sharp decline in Q1 during the lockdown.

While shared mobility continues to suffer, demand for personal mobility has increased the replacement demand. Exports, which account for 26%-27% of the total industry revenues, have also recovered from the lows of early 2020, despite the pandemic.

On the cost front, accommodative commodity prices of Q1 and Q2 have given way to a sharp increase in the prices of key raw materials like steel, copper and rubber, among others since early Q3 FY2021, ICRA highlighted.

“The availability of raw materials has also been a cause of concern in recent months as demand-supply rebalanced globally. This will trigger a price hike from January 2021 across most OEMs. This could depress retail offtake as prices were already higher, following the transition to BS-VI,” it added.

Since the automotive industry’s volumes will take 2-3 years to revert to the pre-COVID highs, the sector’s investment will remain weak, ICRA said. It noted that the industry Capex hit a decadal low of sub 5% in FY21 as players focused on conserving liquidity. “While the Capex intensity (Capex/sales) will return to the normal 6%-7% range slowly during FY 2022-23, any substantial increase in debt-funded Capex and investment plans is unlikely, given the sizable reduction in capacity utilisation in FY21,” the agency said.

ICRA expects the Indian auto component industry’s revenue to grow by 16%-18% in FY22, supported by increasing content per vehicle, low base effect and higher realisation, partly from the pass-through of commodity price hikes.

The industry’s operating margins are likely to revert to the normal level of 13% (± 50 bps), after hitting multi-year lows in FY21. The rating agency further said that OEMs’ cost control measures, increasing localisation, and improved economies of scale will support margin expansion.