Companies

Spurred by stable demand in vehicle sector, likely easing of supply chain-related constraints in coming months

Auto parts makers’ revenues are expected to grow by 8-10 per cent Fy23 fiscal, supported by stable demand in the vehicle sector and likely easing of supply chain-related constraints in the second half of this fiscal, according to a report by rating agency ICRA. 

In the last fiscal year, 31 auto component companies with cumulative revenues of over ₹1,75,000 crore had registered a 23 per cent year-on-year growth in revenues, driven by domestic original equipment manufacturers (OEMs), replacement, export volumes and pass-through of commodity prices. 

Revenue better than estimates

Though the growth came on a relatively low base of FY21, the actual revenue expansion was better than estimates, partly on account of better-than-expected exports and an increase in realisations to pass on the impact of higher commodity inflation and freight costs, it said. 

“The estimated revenue growth for the sample in FY2022 was constrained by factors like semiconductor shortage issues, muted two-wheeler and tractor demand, and the impact of geopolitical developments on international business. However, the industry’s actual revenues were supported by healthy exports and better realisations,” said Vinutaa S, Vice President and sector head, ICRA.  

Hike in raw material, freight costs

The unprecedented inflation in raw material costs and freight costs in H2 FY22 (October-March) and the inability to pass on the same completely and in a timely manner impacted the profit margins in the previous fiscal year. The operating margins of companies in FY22 were the lowest in the last five years. 

Meanwhile, auto ancillaries have displayed an adequate liquidity position, especially across tier-I and tier-II players. The coverage metrics for this sector to remain comfortable going forward as well, aided by healthy accruals and relatively low incremental debt funding, it said. 

While debt levels increased with the rise in working capital intensity, the improvement in operating profits resulted in comfortable debt coverage indicators for the industry. 

The capex spend of the auto ancillary sample for FY22 as a proportion of their operating income was 5.9 per cent, lower than the pre-COVID levels of over 7.5 per cent, which was in line with Icra’s estimates. 

The incremental investments have been primarily towards capability development– new product additions, product development for committed platforms, and development of advanced technology and EV components– unlike investments towards capacity expansion witnessed in the past, it said. 

Published on June 20, 2022