The auto component sector has seen a recovery in the last two quarters on the back of the increased affinity for personal mobility amid the pandemic, and the demand outlook for the next fiscal year remains upbeat after two years of prolonged slowdown. However, factors like the shortage of semiconductors, rise in commodity prices as well as the unavailability of raw materials weigh heavily on the growth prospects.
“With the unlocking of the economy, the sales of vehicles are witnessing improvement, month-on-month, (and) this in turn is leading to production growth in the auto component sector. The sector has now reached pre-Covid level production. Whilst demand is strong, there are headwinds as well. The semiconductor shortage, steep increase in raw material prices and their non-availability, shortage of containers and increasing freight costs could derail the recovery in the automotive sector,” Deepak Jain, president of industry body Automotive Component Manufacturers Association of India (ACMA), told BusinessLine.
“The next year looks promising… It’s hard to forecast, but we expect FY 21-22 to bring auto demand to more or less the 2018-19 level, the best year for most vehicle segments and the auto component industry so far. Yes, there is concern about sufficient availability of semiconductors, and about the increasing price of steel, aluminium and other inputs, but the auto and the component industry are highly innovative and resilient,” said Ashok Taneja, MD and CEO, Shriram Pistons & Rings.
Component manufacturers have been increasing production, sales and profits quarter-on-quarter since August, and most of them expect the year to end only single-digit lower than FY19-20, despite a seriously Covid impacted first quarter, Taneja added.
Semiconductors are predominantly imported and hence have hardly any direct impact on revenues of domestic auto component players, noted Hetal Gandhi. However, the global shortage of semiconductors has impacted production of specific models in the domestic passenger vehicle industry as the lack of this single component impacts the complete production line, she added.
“Thus, component suppliers to such models are expected to have been impacted. However, this represents a small share of the total auto-component production, especially as demand from PV OEMs constitute less than 30 per cent of auto-component production. Despite this, supply constraints owing to limited availability of semiconductors remains a key monitorable,” Gandhi explained.
The prices of raw materials, which have risen sharply, as well as the prolonged delays in the delivery of raw materials are some other concerns. “Prices of steel, which alone accounts for 60 per cent of the raw material cost, witnessed an increase of 15-20 per cent in the quarter ended December 2020. In January this year, there was again an increase of 5-7 per cent,” said Jain. The upsurge in the cost of commodities and raw materials add to the overall cost of products and adversely impact industry margins, he added.
Rising input costs combined with OEMs’ cost-cutting pressure is something the suppliers are always challenged with and the uncertain production environment has only aggravated this, said Suraj Ghosh, Principal Analyst — South Asia Powertrain Forecasts, IHS Markit. “But given the overwhelming response received by some of the new launches and refreshes, the outlook for suppliers looks positive in the short term.”
“The auto component industry clocked a marginal one per cent y-o-y growth in sales during the second quarter of this fiscal. Resultantly, better than anticipated revival is expected to cushion the steep 64 per cent decline in revenues seen in the first quarter of fiscal 2021. Moreover, higher component intensity due to BS-VI norms is also expected to have aided average realisations,” said Gandhi. The automotive-component sector is expected to see a 22-24 per cent spurt in revenues next fiscal as domestic and export demand revive, after two consecutive years of revenue shrinkage, she added.
In Q3FY2021, credit rating agency ICRA revised its outlook on the auto-component industry from negative to stable, with a revival in demand across OEMs, aftermarket and exports market. “Our sample of 50 listed auto component suppliers registered over 20 per cent YoY growth in revenue during Q3FY2021, indicating the worst is behind us… ICRA expects that growth in FY2022 is likely to be strong at 16-18 per cent,” said Ashish Modani - Vice President, ICRA Limited.
“While we believe that industry is likely to witness strong growth, commodity price increase and semiconductor (shortage) pose near term challenges for the industry and are key monitorable. Disruption in automotive production due to supply shortage - especially semiconductors - or slower than expected ramp up in demand are key risks to our growth estimates,” added Modani.