Auto component industry likely to register double-digit degrowth in FY21: Ind-Ra

Auto component industry is likely to witness a second consecutive year of double-digit degrowth this fiscal mainly on account of disruption in operations due to coronavirus pandemic and the subsequent lockdown, according to a report.

The countermeasures are likely to lead to lower-income levels, weaker consumer sentiments, production disruptions, decreased industrial output as well as lesser movement of vehicles, resulting in a decline in global automobile demand and therefore, lower revenue and profitability for auto ancillaries in FY21, India Ratings (Ind-Ra) said in the report on Tuesday.

"Ind-Ra expects that the auto ancillaries industry on an average could record at least 100bp EBITDA margin decline in FY21 and the profitability decline for export-focused auto ancillaries could be steeper as exports earn higher margins. The lower commodity prices could aid the profitability for the sector, though only to a limited extent, due to pass-through agreements with OEMs and OEMs' higher bargaining power.

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"Also, some benefit may accrue to companies with overseas manufacturing units, as certain economies have announced support measures to meet part of the fixed costs during the shutdown period. A depreciated rupee rate could partly offset the decline in sales volumes; however, the benefit is not expected to be significant," it said.

However, the revenue and profitability of auto ancillaries focused on domestic markets are likely to fare better due to higher content per vehicle on the back of evolving regulatory norms including BS-VI applicable from April 1, 2020, as per the report.

Entities with a large reliance on overseas markets are expected to face a higher demand risk as the key markets of the US and Europe have been the most impacted by the virus, which could lead to uncertain business conditions, it said.

The US, Germany and the UK are the largest export markets for auto components globally.

Besides, India also exports around 12 per cent of the total auto components to economies with reliance on crude oil such as Africa and Latin America.

As much as 27 per cent of the total auto component production in the country is exported to various countries with the US accounting for 25 per cent of the total shipments form India, while Germany's share stands at 7 per cent. The exports to the UK and Italy stand around 4 per cent, each.

Noting that over the past few years, India has emerged as the sourcing hub for many original equipment manufacturers (OEMs) globally due to its cost-effectiveness in production and favourable geographical positioning to key markets such as Europe and the Middle East, the India Ratings said the growth of exported components outpaced the overall growth of Indian auto components industry in FY18 and FY19.

"In the first half of the previous fiscal (FY20), while the domestic auto components sector recorded a revenue decline of about 10.1 per cent over the year-ago period, exports recorded modest growth of 2.7 per cent y-o-y (in USD terms)," it said.

The domestic components suppliers have also been expanding their exports exposure to diversify their revenue streams and limit dependence on the domestic market, while improving profitability as exports are typically higher margin orders, according to India Ratings.

Furthermore, OEMs could postpone new model launches and investment plans, which would defer order offtake, it said.