Indian auto component makers seen facing pressure on margins

Even though margins will be under pressure, healthy volume growth of over 10 per cent to 12 per cent should help the auto component industry maintain its cash accruals at the current levels, it noted.

Pointing out that the intensity in competition amongst OEMs will persist as the automobile sector further grows out of the slump, CARE Research Head Revati Kasture said: “amidst the war for market share amongst OEMs, their profitability would take a hit.”

At the same time, commodity prices have started climbing up on the back of global economic recovery and the uptrend is expected to continue.

With the cost of inputs like steel, aluminium, natural rubber, plastics set to go up, Kasture observes that stiff competition would not allow complete pass-through of rising input costs by the OEMs.  On top of it, increasing imports is another cause of concern for the industry.  The share of imports to domestic consumption is likely to increase due to duty reduction on several auto parts under free trade agreements (FTAs) with ASEAN and South Korea.

Incidentally, rising competition, she said, would also translate into higher selling and distribution costs for the OEMs in terms of higher advertisement and promotion costs, discounts to buyers as well as probable higher dealer commissions.  
“We foresee the EBITDA margins of the OEMs to come down by 150 – 200 basis points in the next 15 – 18 months,” adds Kasture. 

CARE Research opines that the EBITDA margin of the auto component industry is expected to be battered by 200–300 basis points from 14 per cent to 15 per cent in 2009-10 to 11 per cent  to 12 per cent in 2010-11 and further soften by 50 – 100 basis points to 10 per cent to11 per cent in 2011-12.
DH News Service