FY2020-2025 revenue to remain modest for Indian Components industry, says ICRA

Pass through of commodity prices and change in emission norms has also resulted in 4%-6% increase in realisations, partly supporting revenue growth during H2 FY2021. The rebound in FY2022 is expected to be strong at 20-23%, benefitting from demand pickup, low base of FY2021 and impact of commodity prices on realisations. However, this would come supported by low base of Q1 FY2021 when industry revenue collapsed by approximately 60%.

Also, headwinds from disruption in automotive production due to supply chain constraints (primarily due to semi-conductor shortage, globally) could play spoil sport in Q1 FY2022 and may be even beyond. Localised lockdown due to recent spike inCovid-19 infections could also derail the growth momentum for the industry as footfalls to dealerships may shrink and remains a monitorable. Despite the strong revenue growth during FY2022, the overall revenue CAGR during FY2020-2025 is likely to remain modest at 7%-9%.

The sharp V-shaped recovery is likely to cap the overall margin contraction for auto ancillaries (ex-tyres) in FY2021 to 100bps to 150bps. Entities heavily dependent on the M&HCV segment will be the most impacted and could witness a margin contraction of over 300 bps, whereas those catering to tractors, PV and 2W segments will be relatively better placed. On the other hand, tyre manufacturers will register multi-year high operating margin at over 15%in FY2021 supported by favourable RM prices. ICRA expects auto ancillaries (ex-tyres) to bounce back to pre-Covid (FY2020) margins in FY2022, benefitting from improved operating leverage, despite commodity headwinds.

Says Ashish Modani, Vice President, ICRA, “Automobile production volumes during H2 FY2021 was significantly better than H1, capping the overall production volume decline for the fiscal. The aftermarket segment also witnessed sequential recovery from Q2 FY2021, with the opening up of the economy, pent-up demand, delayed replacement of vehicles and festive season demand. We expect a flattish to low single digit growth for the replacement segment in FY2021, and a 10-12% increase in FY2022, partly arising from the commodity pass through. Supported by improved demand and additional financing support from banks, liquidity position of most auto ancillaries has improved substantially from Jun-2020 levels, with many entities who availed moratorium benefits skipping restructuring proposals, despite eligibility. With improved cash flows and easing liquidity position, ICRA revised its credit outlook for the sector to ‘Stable’ from ‘Negative’ in Dec-2020. Strong growth across automotive segments is further likely to improve credit profile of industry players in the coming quarters.”

Steel, aluminium and copper have witnessed significant price increases in the last five to six months and this is likely to continue in the near term as well. The weighted average commodity index for a passenger vehicle has surpassed FY2019 levels in FY2021, primarily because of sharp increase in commodity prices since Nov-2020. Prices of electronic components have also surged due to supply disruption/shortage following increased demand in consumer electronics. Unavailability/price increase of electronic components remains a key downside risk for the industry. The INR depreciation is also a cause of concern for net importers.

Revenue of ICRA’s auto component sample of 50 listed auto-ancillaries witnessed a stellar YoY growth of 22.1% in Q3 FY2021, aided by demand pickup across segments and commodity pass through. For 9M FY2021, ICRA’s auto component sample set witnessed a YoY decline of 13.4%; however, strong double-digit revenue growth expectation in Q4FY2021 will restrict the overall revenue decline to single digit. Operating profit margins of our overall sample stood at a multi-quarter high of 15.5% in Q3 FY2021 benefitting from healthy volumes and commodity pass through. Within the sample set, tyre companies reported multi-year high margins because of muted raw material prices.

Adds Vinutaa S, Assistant Vice President, ICRA, “Strong cash accruals of the past few years have resulted in low leverage for auto ancillaries. The aggregate TD/OPBDIT for ICRA’s sample of 50 listed auto-ancillaries was at 1.4 times in FY2020. The industry sample has consistently reported high interest coverage metrics (above 8x) over the last several quarters, barring Q1 FY2021 when operating profits were impacted by the pandemic-induced lockdown.

Large tier-I suppliers, who have used their cash flows from the upcycle to develop a strong balance sheet were more resilient to the recent downturn. The stress was relatively higher in the smaller entities and those lower down the value chain with limited access to capital and with stretched working cycles. Nevertheless, assistance from banks and the Government in the form of additional Covid lines, CGSTME support and loan moratorium provided the much-needed liquidity support to the MSMEs to tide over the crisis in H1 FY2021. Further, the handsome recovery in domestic automotive demand provided a boost to the industry’s revenue and profitability, resulting in none of ICRA rated auto ancillaries in the BBB category or higher level applying for loan restructuring.”

Decline in turnover during FY2021 released funds blocked in working capital, thereby arresting any meaningful slippages in leverage level (0.2x in FY2020 and FY2021e), though coverage indicators moderated across the board – the total debt/OPBDITA for ICRA’s auto component sample is expected to increase to 1.6x in FY2021e from 1.4x in FY2020 while the interest cover would moderate to 7.8x in FY2021e from 8.6x in FY2020.

Incremental borrowings are largely related to working capital financing and fund raised by companies to tide over possible liquidity crisis during H1 FY2021. The industry had almost frozen its capex / investment plans in the last 15-18 months and is now exploring investment opportunities. Incremental investments are primarily towards committed orders/platforms, which will be largely funded by internal accruals and hence the long-term borrowing requirement remains limited.

 “Our interaction with large auto component suppliers indicates a cautiously optimistic approach towards capex/investment plans for FY2022, with most of these players awaiting clarity on Government support for the production-linked incentive (PLI) scheme. ICRA research expects auto component suppliers to gradually increase their capex/investment outlay in FY2022, though most of these investments will 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. Despite the strong growth in FY2022, production volumes across most automotive segments will remain below the FY2019 level and hence capacity will not be a constraint for the industry,” concludes Ashish Modani.