Auto parts industry may see more than 20% growth in revenue in FY22: ICRA

Our Bureau Chennai | Updated on July 26, 2021

Despite strong revenue growth and consequent benefits from operating leverage expected, headwinds like high commodity prices and semi-conductor shortage are expected to impact margins, it says

The Indian auto components industry is expected to report a 20-23 per cent growth in revenue this fiscal, supported by strong exports demand, and recovery in domestic OE and aftermarket segments.

The growth would come in on the low base of last two fiscals and will look optically strong because of the exceptionally weak first half of fiscal year 2021 (H1FY21). The industry has bounced back handsomely during the second half of last fiscal, with many auto component suppliers registering record revenue and profits during fourth quarter of fiscal year 2021 (Q4FY21), according to ratings agency ICRA.

Exports, which accounts for 29 per cent of the industry’s turnover, also witnessed healthy recovery, supported by strong traction in key target markets, i.e. the USA and Europe. Given strong rebound in the US Class 8 truck market and large infrastructure investments expected, exports are likely to remain a bright star for the industry in the near term, it said.

Effects of Covid 2.0

The Covid 2.0 applied a temporary brake on the auto component industry’s recovery prospects in Q1FY22. The aftermarket sales were also impacted for close to 4-6 weeks, because of the curfews/lockdowns and closure of workshops. The industry’s revenues declined by 30-40 per cent on a quarter-on-quarter (q-o-q) basis, despite growth in exports. While the q-o-q decline was relatively sharp, revenues were more than double of Q1FY21 levels.

“For the full year FY22, we expect a revenue growth of 20-23 per cent aided by growth across segments and commodity pass through, albeit on a low base. However, headwinds such as sharp increase in commodity prices, supply chain disruptions partly arising from semi-conductor shortage and premium freight expenses are expected to weigh in industry margins in FY22, partially offsetting benefits arising from improved operating leverage,” said Ashish Modani, Vice-President and Sector Head, ICRA.

Commodity prices are expected to remain at multi-year highs in H1FY22 (resulting in multi-year high average in FY22), before softening in H2FY22. Also, semiconductor shortage remains a challenge for the automotive industry and is expected to result in supply chain disruptions. Increase in air freighting, resulting in higher freight costs for the industry, also remains a challenge, it said.

Despite the strong revenue growth and consequent benefits from operating leverage expected, these headwinds are expected to weigh in on margins. In the backdrop of soft commodity prices, tyre companies witnessed a multi-year high operating margin in FY21, which will moderate to 13-14 per cent level over the medium term. Operating margin of auto component suppliers (ex-tyres) is likely to witness year-on-year (y-o-y) improvement of 50-75 basis points in FY22 due to operating leverage benefits, though sharp increase in commodity prices will keep overall margin expansion under check.

“Our interaction with large auto component suppliers indicates a cautiously optimistic approach towards capex plans for FY22, with investments expected to be largely funded by internal accruals. The incremental investments will be primarily towards capability development, i.e. new product additions and committed platforms, unlike the investments towards capacity expansion witnessed in the past,” added Modani.

Published on July 26, 2021

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