Backed by strong export demand and sharp recovery in the domestic market, the Indian auto component industry is expected to report a 20-23% revenue growth in FY2022.
In a press statement, the rating and research agency said the growth would come in on the low base of the last two fiscals and will look strong because of the exceptionally weak H1 FY21.
The industry has bounced back handsomely during H2 FY21, with many auto component suppliers registering record revenue and profits during Q4 FY21, it said.
Exports, which account for 29% of the industry’s turnover, also witnessed healthy recovery, supported by strong traction in key target markets i.e. USA and Europe. Given the 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.
ICRA is cautious about chip shortages, slow vaccination roll-out in some regions, logistics challenges, and further lockdowns as they can act as demand dampeners.
Ashish Modani, Vice President and Sector Head, ICRA, said, “The COVID 2.0 applied a temporary brake on the auto component industry’s recovery prospects in Q1 FY22. 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% on a Q-o-Q basis, despite support from exports. While the Q-o-Q decline was relatively sharp, revenues were more than double of Q1 FY21 levels.
He added, “for the full year FY22, we expect a revenue growth of 20-23% aided by growth across segments and commodity passthrough, albeit on a low base. However, headwinds such as sharp increase in commodity prices, supply chain disruptions partly arising from semiconductor shortage and premium freight expenses are expected to weigh in industry margins in FY22, partially offsetting benefits arising from improved operating leverage.”
Commodity prices are expected to remain at multi-year highs in H1 FY22 (resulting in multi-year high average in FY22) before softening in H2 FY22.
Also, the semiconductor shortage remains a challenge for the automotive industry and is expected to result in supply chain disruptions.
In addition, an increase in air-freight, resulting in higher freight costs for the industry, also remains a challenge. Despite the strong revenue growth and consequent benefits from operating leverage anticipated, 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% level over the medium term.
The operating margin of auto component suppliers (excluding tyres) is likely to witness Y-o-Y improvement of 50-75 bps in FY22 due to operating leverage benefits, though the sharp increase in commodity prices will keep overall margin expansion under check.