Why auto component makers may post robust gain after strong growth last year

The Indian automobile sector had been hit with a triple whammy of slowing demand before the pandemic along with shortage of chips and cost push due to the higher raw material prices.

The automotive component sector is intrinsically linked to the fate of the overall market, but also has a strong demand from after-market sales that comes as a hedging factor in terms of demand. Intuitively, if consumers are buying fewer new vehicles, they are sweating existing automobiles and thereby would need to replace parts due to wear and tear.

The segment derives about 61% of its income from automobile original equipment manufacturers (OEMs), 18% from the aftermarket, and the rest via exports.

So even as the overall Indian automobile sector is yet to come out strongly from the trench, the components sector is expected to see revenue cranking up 14-16% to a new high this fiscal year. This will mark the second straight annual double-digit growth milestone after the 24% growth clocked last fiscal year, according to credit rating and research agency CRISIL.

The agency said the industry’s operating margin will be stable at 12-13% due to better utilisation and as companies pass on higher input costs to customers, albeit with a lag. Improved demand outlook across segments will also drive a 30% rise in capital expenditure, which will be funded partly through debt, and the balance through higher accruals generated.

The firm analysed data of 220 automotive component entities, which account for about one-third of the sector revenue of Rs 4.2 lakh crore, to come out with its forecast.

Demand from OEMs is expected to grow the fastest at 18-20% this fiscal, driven by higher production of commercial and passenger vehicles. Aftermarket demand is expected to grow at a modest 7-9% on a high base of the previous fiscal while exports are likely to grow 8-10% after a robust 40% jump last year as demand rose from the developed markets.

Meanwhile, the sharp increase in input prices, especially steel and aluminium, since January 2021 has been partly neutralised as the cost increase were passed on to the OEMs.

Higher operating leverage and moderation in steel prices from this month due to the recent imposition of export duty on many steel products (including automotive grade steel) is likely to tone down the overall cost base despite rising logistics expenses. CRISIL said that this will ensure operating margin remains stable at 12-13% this fiscal, though still below the 14% level achieved three years ago, one of the best years for the sector.