The auto components industry is expected to log 20-23 per cent revenue growth during this fiscal, supported by recovery in the domestic automobile sector and robust exports, with all segments (passenger and commercial vehicles) likely to report healthy double-digit growth in 2021-22, credit ratings agency ICRA said on Thursday. However, prices of key commodities and shortage of semi-conductors remain the key concerns for the industry, it said.
The domestic auto component industry has seen a smart recovery during the first quarter of this fiscal, driven by strong exports and revival of domestic demand in June, ICRA said in a statement.
Most domestic automobile segments, especially passenger vehicles (PVs) and tractors, continue to witness strong demand and are almost at pre-COVID-19 levels. Even the M&HCV (medium and heavy commercial vehicle) segment, which was impacted during the April quarter, is also now showing signs of recovery, it said.
ICRA's sample of 50 auto component suppliers witnessed a strong revenue growth of 140 per cent y-o-y, albeit on a low base of Q1 FY2021, the statement said.
It added that despite the COVID-19 2.0 restrictions, the overall decline in Q1 FY2022 was restricted to 19 per cent on a sequential basis.
This is in contrast to ICRA's earlier estimate of a quarter-on-quarter decline of 30-35 per cent.
According to the statement, the revenue decline for aftermarket-dependent components like tyres and batteries was capped at 13 per cent as against a steeper 19 per cent decline for the broader sample.
"We expect the industry to witness 20-23 per cent revenue growth during FY2022, supported by recovery in the domestic automobile industry and robust exports.
"The passthrough of increase in commodity prices will also add to the revenue growth," said Ashish Modani, sector head and vice-president (corporate ratings), ICRA.
The industry gross margins improved sequentially in the first quarter of 2021-22, but remain lower than the historical trend. The shortage of semi-conductor and an increase in commodity prices remain key challenges for the industry in the near term, he added.
However, one of the concerns for the industry, according to ICRA, is the prices of key commodities which continue to remain at elevated levels, despite some moderation in recent months.
Auto component suppliers usually pass on the impact of commodity price increases to original equipment manufacturers (OEMs) with a lag of 1-2 quarters. The recent trend also suggests that they have gradually passed on the hike in commodity prices to their customers, as reflected in the sequential improvement in gross margin, it said.
However, the gross margin remains lower than the normal levels (which were prevalent in FY2020) by 100 basis points. Further, given the average inventory holding period of 30-45 days, some companies would have also had the benefit of lower priced inventory, it said.
The shortage of semi-conductors remains another key concern for the industry. The automotive industry accounts for 11 per cent of global semi-conductor demand. Stronger-than-expected recovery, along with supply disruption at some semi-conductor manufacturing facilities, has aggravated chip shortage issues globally, as per the ratings agency.
ICRA said the automobile supply chain is long and complex, with OEMs/tier-1 relying on just-in-time inventory management practices. The rating agency added that it takes about six months from chip production to car production, with several tiers of suppliers in between, which has resulted in this global demand-supply mismatch.
In India, many PV OEMs have acknowledged the impact on production volume due to semi-conductor shortage, with volume loss of one lakh units in the second quarter of FY2022, which accounts for around 3 per cent of their annual production itself.
The supply bottleneck poses a major challenge to the industry with waiting period for few models/variants exceeding four months, though underlying demand remains strong, it said.
ICRA's interaction with industry participants indicates that supply shortage is likely to continue at least till the end of the calendar year 2021, which will remain an overhang on the industry's revenue growth prospects.
Nevertheless, the challenges faced by OEMs in India have been relatively limited due to lower semi-conductor-based components given the sales mix being skewed in favour of Class A&B cars. Further, OEMs have been trying to develop alternative sources, airlift material and pursue other innovative solutions to overcome the semi-conductor supply issue, it said in the statement.
On the financial performance, most auto component suppliers witnessed a sequential decline in operating margin due to the impact of second COVID-19 wave on overall revenues. Over 85 per cent entities in ICRA's sample witnessed q-o-q reduction in raw material cost proportion during Q1FY2022 which partially supported profit margins, it said.
It added that select auto component suppliers registered q-o-q improvement in revenue, supported by healthy exports and improved demand in the key end-user industries.
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