The demand for auto components from domestic original equipment manufacturers (OEMs), especially high volume two-wheeler (2W) and passenger-vehicle (PV) industry which together constitute about two-third of overall ancillary industry size, has remained strong in Q3FY2018. Moreover, stellar growth in CV as well as tractor segment has further supported overall volume growth. According to an ICRA note on the industry, given the indicative trends, the growth momentum is expected to sustain in Q4FY2018 as well. This will be strongly supported by improved demand outlook in key end user segments as well as expected pickup in rural income. Going forward, pickup in infrastructure activity will further drive growth in construction & mining equipment as well as the tipper segment (classified under M&HCVs).
ICRA’s sample of 48 auto ancillaries, comprising around 26% of the industry’s turnover, grew 18.5% revenue-wise during Q3 FY2018. The same appeared stronger on low base of last fiscal, where overall performance was impacted by demonetization. Overall, during 9MFY2018, the sample space grew by 12.3% which was better than the earlier 9%-11% growth estimate for FY2018e. Given strong revenue growth the growth estimates have been revised upward for FY2018e to 13-15%.
ICRA expects industry-wide credit 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. This, despite the fact that the industry has been on a consolidation mode over the last two years, taking steps towards deleveraging their balance sheet, given the surplus capacity. However, select OEMs are exploring inorganic growth opportunities in India as well as in overseas market to support growth as well as diversify its clientele and product portfolio. Ancillaries continue to focus towards 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.
As for the industry outlook, a senior official of ICRA said, “ICRA research has revised upward its revenue growth estimate from 9-11% to 13-15% for FY2018e in the backdrop of robust growth expectation in domestic PV, CV, tractor and 2W segment. Revenue growth will be also supported by steady increase in the commodity prices and consequent impact on the realization. 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.”