Auto components sector set for a rebound

The automotive components sector will see revenue rebound 21-23% next fiscal as domestic and export demand revives after two straight contractions. Higher margins will lift operating profits, too.

That, along with prudent capital spending and working capital management, will lead to an improvement in the credit profiles of automotive component makers next fiscal, an analysis of 230 of them rated by CRISIL, which account for 40% of sector revenue, shows.

The Rs 3.2 lakh crore sector derives ~60% of its revenue from automobile original equipment manufacturers (OEMs), with the balance split equally between replacement demand and exports.

Says Hetal Gandhi, Director, CRISIL Research, “The ongoing rebound in economic activity will drive a strong recovery for OEMs next fiscal. Improving fleet utilisation and better availability of finance will also improve demand for commercial vehicles, while demand for personal vehicles (passenger cars and two-wheelers) will be driven by improving urban consumer sentiment, resilient rural incomes, modest vehicle price increases and attractive financing options.”

The uptick in OEM demand will rub off on the automotive components sector, which could see a revenue growth of 21-23% next fiscal, compared with de-growth of 13% and 8% in fiscals 2020 and 2021, respectively.

Replacement demand, which was impacted due to lockdowns and restricted movement of people and freight, will recover gradually. Besides, exports (~20% of revenue) will be aided by steady demand from the US and staggered recovery in the European Union – two geographies that account for ~55% of India’s automotive component exports. Signs of the recovery have been visible here since the third quarter of this fiscal.

However, despite higher demand, capacity utilisation of component suppliers will remain below 2019 levels. As a result, operating margin will increase only 100-150 basis points (bps) to ~10% next fiscal, after falling ~150 bps in fiscal 2020 and 200-250 bps in fiscal 2021 (see annexure). Consequently, operating profit will be lower than in fiscal 2019.

The credit ratio (ratio of upgrades to downgrades) for the CRISIL Ratings portfolio, which touched an eight-year low of 0.1 (April-December 2020) thus far this fiscal, is likely to witness steady improvement next fiscal, in line with better performance of the sector’s players.

Says Rajeswari Karthigeyan, Associate Director, CRISIL Ratings, “Better operating performance, controlled capital spend – given that sufficient capacity is available – and prudent working capital management will support recovery in credit profiles of automotive-component suppliers next fiscal.

As the impact of the pandemic wanes, the government’s move to increase spending on infrastructure augurs well for the automobile sector and, in turn, for the automotive components makers.