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6
December 2017
 |
ICRA (The Total Investment
& Insurance Solutions)
The
Rs2.90 trillion (FY2017) domestic auto component industry is expected to grow
by 9-11% during FY2018e, driven by robust growth expectation in domestic
passenger vehicles (PV)s and two wheelers (2W) segment. According to an ICRA
note, after considering the increasing content per vehicle due to various
technological advancement as well as regulatory measures (emission, safety
regulations), the growth in the auto component industry will be relatively
higher than the underlying growth in the automotive industry in the medium to
long term. The Total Investment & Insurance
Solutions
ICRA’s sample of 48 auto ancillaries, constituting around 25% of the industry’s turnover, witnessed revenue growth of about 13.5% (revenue) during Q2 FY2018e. The same was driven by higher realization in the backdrop of steady increase in commodity prices, whereas volumetric growth was in the mid-single digit. Overall, during H1FY2018, the sample space grew by 9.5% which is in line with 9%-11% growth estimate for FY2018.
Exports, which account for 28% of industry’s demand, with the US and Europe making up for 60%, witnessed a decline. This was sharper in the US M&HCV market during H2 CY2015 and CY16. However, the trend seems somewhat reversed now with incremental order inflow for class-8 trucks being encouraging over the last six months. As for European markets, new PV and CV registration numbers have witnessed marginal growth YTD CY2017 and their growth outlook remains tepid over the near to medium term. Exports will also be affected by rupee appreciation.
Commodity prices have been rising over the last 4-5 quarters, thereby pressurising industry’s profitability. Amongst all ancillaries, tyre manufacturers were the worst impacted due to sharp volatility in rubber prices which has peaked around Rs 160/Kg in Q4FY17, though it subsequently moderated to around Rs 130/Kg level at present. Easing rubber prices has helped operating margins to recover during Q2FY18 after a five year low level during Q1FY18. Other commodities like steel and lead also remained at elevated level and continued to pressurize profitability of players. Nevertheless, strong revenue growth during Q2FY2018 has offset some impact of commodity price pressure. Though overall OPM continues to remain lower than last year’s level, most auto ancillaries have witnessed sequential improvement in operating margins.
ICRA expects industry-wide credit profile trends to remain stable, supported by robust demand from the OEM segment in the near term. Supported by healthy cash accruals, gearing as well as coverage indicators for the industry have improved considerably over the past two years. However given surplus capacities, the industry has been on a consolidation mode over the last two years, taking steps towards deleveraging their balance sheet. With select OEMs exploring inorganic growth opportunities in India as well as in overseas market to support growth, as well as to diversify its clientele and product portfolio, some incremental leverage may be expected. Overall ancillaries are concentrated on moving up the value chain to mitigate profitability and competitive pressure in the intensely competitive industry.
Incremental investments by auto ancillaries are primarily towards new order/platform related requirement or debottlenecking of existing capacity. Few have started investing keeping in mind the requirements for BS VI (in 2020), CAFE norms and electric vehicles in 2030. The Total Investment & Insurance Solutions
ICRA’s sample of 48 auto ancillaries, constituting around 25% of the industry’s turnover, witnessed revenue growth of about 13.5% (revenue) during Q2 FY2018e. The same was driven by higher realization in the backdrop of steady increase in commodity prices, whereas volumetric growth was in the mid-single digit. Overall, during H1FY2018, the sample space grew by 9.5% which is in line with 9%-11% growth estimate for FY2018.
Exports, which account for 28% of industry’s demand, with the US and Europe making up for 60%, witnessed a decline. This was sharper in the US M&HCV market during H2 CY2015 and CY16. However, the trend seems somewhat reversed now with incremental order inflow for class-8 trucks being encouraging over the last six months. As for European markets, new PV and CV registration numbers have witnessed marginal growth YTD CY2017 and their growth outlook remains tepid over the near to medium term. Exports will also be affected by rupee appreciation.
Commodity prices have been rising over the last 4-5 quarters, thereby pressurising industry’s profitability. Amongst all ancillaries, tyre manufacturers were the worst impacted due to sharp volatility in rubber prices which has peaked around Rs 160/Kg in Q4FY17, though it subsequently moderated to around Rs 130/Kg level at present. Easing rubber prices has helped operating margins to recover during Q2FY18 after a five year low level during Q1FY18. Other commodities like steel and lead also remained at elevated level and continued to pressurize profitability of players. Nevertheless, strong revenue growth during Q2FY2018 has offset some impact of commodity price pressure. Though overall OPM continues to remain lower than last year’s level, most auto ancillaries have witnessed sequential improvement in operating margins.
ICRA expects industry-wide credit profile trends to remain stable, supported by robust demand from the OEM segment in the near term. Supported by healthy cash accruals, gearing as well as coverage indicators for the industry have improved considerably over the past two years. However given surplus capacities, the industry has been on a consolidation mode over the last two years, taking steps towards deleveraging their balance sheet. With select OEMs exploring inorganic growth opportunities in India as well as in overseas market to support growth, as well as to diversify its clientele and product portfolio, some incremental leverage may be expected. Overall ancillaries are concentrated on moving up the value chain to mitigate profitability and competitive pressure in the intensely competitive industry.
Incremental investments by auto ancillaries are primarily towards new order/platform related requirement or debottlenecking of existing capacity. Few have started investing keeping in mind the requirements for BS VI (in 2020), CAFE norms and electric vehicles in 2030. The Total Investment & Insurance Solutions
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