The Indian auto component industry’s growth in revenue is expected to ease to five-seven per cent in fiscal year (FY) 2025, from the highs of around 14 per cent in FY2024, said a report on Thursday.

Operating margins are set for a year-on-year (Y-o-Y) improvement of around 50 bps in FY2025, benefitting from better operating leverage, higher content per vehicle, and value additions, while remaining exposed to any sharp volatility in commodity prices and foreign exchange rates, market tracker ICRA said.

It also said that the industry is likely to incur significant capital expenditure (capex) of ₹20,000-25,000 crore in FY2025, with a focus on capacity expansion and technological advancements. Further, it projected that electric vehicles (EVs) present a significant growth opportunity, with EV penetration expected to reach 25 per cent of domestic two-wheeler sales and 15 per cent of passenger vehicle sales by 2030.

Capex is anticipated to hover around eight-ten per cent of operating income over the medium term, with the production linked incentive (PLI) scheme also contributing to accelerating capex towards advanced technology and EV components, it said.

“Demand from domestic original equipment manufacturers (OEM) constitutes over 50 per cent of sales for the Indian auto component industry and the pace of growth in the segment is expected to moderate in FY2025. Growth in replacement demand is pegged at five-seven, after two to three years of healthy growth, following a relatively weak quarter one (Q1) in the current fiscal,” Vinutaa S, Vice President and Sector Head – Corporate Ratings, ICRA, said.

Exports, which account for close to 30 per cent of the industry’s revenue, are likely to be impacted by the subdued growth in end-user markets, she said. Nevertheless, ancillaries will benefit from supplies to new platforms as the global OEMs diversify their vendor base and increase outsourcing, she added.

The projected moderation in revenue growth in FY2025 stems from the expected moderation in the growth pace of the domestic OEM segment. On the exports front, new vehicle registrations in Europe and the US are expected to remain tepid over the next few quarters, impacted by the weak global macroeconomic environment and geopolitical tensions, ICRA said in the report.

However, there would be opportunities for Indian players in metal casting and forgings with the winding up of plants in the European Union due to viability issues, it said.

Over the medium-to-long term, ICRA expects EV-linked opportunities, premiumisation of vehicles, focus on localisation, and changes in regulatory norms to support stable growth for auto component suppliers.

Further, the disruption along the Red Sea route has resulted in a surge in container rates by two to three times in the first half of this calendar year compared to CY2023, while shipping time has also increased by around two weeks, the report said.

Given that close to two-thirds of the auto component exports are made to North America and Europe, and one-third of the imports are made from these regions, a sharp and sustained increase in freight rates could have a bearing on margins for these players over the next few quarters, it added.