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News18 » Auto
3-min read

Auto Component Industry May See Single-Digit Growth in FY 2020-21

Vehicle demand is also expected to be impacted by the new safety norms for passenger vehicles and two-wheelers, and the BS-VI emission norms, which come into effect from April 1, 2020.

PTI

Updated:August 28, 2019, 3:18 PM IST
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Auto Component Industry May See Single-Digit Growth in FY 2020-21
Image for Representation (REUTERS/Adnan Abidi/File Photo)
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The auto component industry is projected to register a lower 5-7 per cent compounded annual growth rate (CAGR) over the fiscals 2020 and 2021 as against 12 per cent in the preceding two fiscals amid a slump in domestic vehicle sales, rating agency Crisil said on Tuesday. Besides, the industry's topline growth is likely to recede to half in the next two fiscals, though tighter safety and emission norms for original equipment makers (OEMs) could give partial relief to the Rs 3.5 lakh crore industry, Crisil said.

An analysis of around 300 Crisil-rated component firms, which account for almost 40 per cent of the industry's revenues, reveals that capex spend will be discretionary and could be around 15 per cent lower at Rs 12,000 crore in fiscals 2020 and 2021, compared with the preceding two fiscals. The upcoming safety and emission norms will boost demand for components such as airbags, engine systems, exhaust management systems, and electronic and electrical parts, said Hetal Gandhi, director, Crisil Research.

"These new regulations alone are expected to account for 25-30 per cent of the incremental demand for automotive components in the next two fiscals. The growth in fiscal 2020 and 2021 would be even lower but for the higher component intensity resulting from the regulatory changes, besides steady aftermarket sales and healthy exports," she said. Production volume of OEMs is estimated to either degrow or log low single-digit growth at best in the next two years, Crisil note said, adding higher insurance costs, lower availability of finance and low growth in rural wages is

affecting off-take in fiscal 2020.

Vehicle demand is also expected to be impacted by the new safety norms for passenger vehicles and two-wheelers, applicable in fiscal 2020, and the Bharat Stage (BS) VI emission norms, which come into effect from April 1, 2020, as these will drive up vehicle prices across categories, it added. According to Crisil, these factors are affecting new vehicle sales and in turn causing an impact on the automotive component sector, as OEMs account for 65 per cent of component demand.

Nevertheless, the new safety and emission norms do offer a ray of hope to component manufacturers as these will increase the component content in vehicles, it added. "Most component firms have strengthened their balance sheets significantly in the past 3-4 years, and average gearing (debt/ net worth) stood at around 1 time in fiscal 2019, the lowest in a decade. That, coupled with lower capex spend, will limit the material impact on credit profiles," said Aparna Kirubakaran, associate director, Crisil Ratings.

However, credit profiles of firms with limited segmental and geographical diversification, or those highly dependent on single customer segments are likely to be vulnerable, more so if they have recently undertaken large debt-funded capex," she added. According to Crisil, the aftermarket demand, which accounts for around 16 per cent of sector revenue is expected to maintain the trend of 7-8 per cent growth. But exports, which contribute around 19 per cent of sector revenue is likely to grow at 10-12 per cent in fiscals 2020 and 2021, well below the 18 per cent seen in the preceding two fiscals, because of lower demand in traditional markets such as the US and Europe, it said.

However, exports will still be healthy, with players expanding beyond these traditional markets. Besides, BS-VI compliance will allow them to penetrate deeper into geographies with similar regulatory requirements, Crisil said. Operating profitability, however, is likely to decline 100-150 basis points to around 11 per cent over the two fiscals following lower revenue growth and rising employee, power and freight costs.

Nevertheless, credit quality for most automotive component firms is expected to be supported by lower capital spending and improved balance sheets. As they navigate the challenging business environment, component firms are likely to prune capital expenditure, Crisil said.

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| Edited by: Chhavianshika Singh
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