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New Delhi: With the rapid rise in vehicle sales, the Indian auto components are expected to see a second straight year of double digit growth of about 14%-16% in FY23, rating agency CRISIL has reported. Notably, in the previous fiscal the sector clocked about 24% growth.

The rating agency has noted that the operating margin will be stable at 12%-13% due to better capacity utilisation and the passing on of the higher input costs to customers with a lag. Improved demand outlook across segments will drive a 30% rise in capital expenditure, which will be funded partly through debt, and the balance through higher accruals generated.

The report is based on an analysis of 220 automotive component entities rated by CRISIL Ratings. These companies account for about one-third of the sector’s revenue of INR 4.2 lakh crore.

The segment derives about 61% of its income from automobile original equipment manufacturers (OEMs), 18% from the aftermarket, and the remaining 21% from exports.

According to Pushan Sharma, Director, CRISIL Research, demand from OEMs should increase by 18%-20% this fiscal, driven by higher production of commercial and passenger vehicles (PVs). “Aftermarket demand is expected to grow 7%-9% on a high base of the previous fiscal, which benefited from a prolongd vehicle replacement cycle amid the pandemic. And component exports will rise 8%-10% on top of about 40% growth in the previous fiscal due to steady demand from the US and European markets,” he said..

There has been a sharp increase in input prices — primarily of steel and aluminium — over the past 18 months. The impact on operating profitability has, however, been somewhat muted as the bulk of the input cost increase has been passed on to OEMs.

Higher operating leverage and moderation in steel prices from June 2022 due to the recent imposition of export duty on many steel products (including automotive grade steel) will help buttress the impact of rising freight costs. This will ensure operating margin remains stable at 12%-13% this fiscal, though still below ~14% achieved in fiscal 2019, which was among the better years for the sector.

“Capex by CRISIL-rated automotive component makers is expected to see a significant step-up of ~30% this fiscal, driven by strong demand outlook, including for electric vehicles, and investments related to the Production-Linked Incentive scheme. Working capital should also increase due to higher cost of inventory caused by elevated commodity prices. But higher operating profits would nevertheless support healthy debt metrics leading to ‘Stable’ credit outlook for players. The debt to Ebitda ratio of automotive component makers is estimated at ~2 times and interest coverage ratio 6-7 times in fiscal 2023, almost similar to last fiscal,” Naveen Vaidyanathan, Director, CRISIL Ratings, said.

The persistent semiconductor shortage which can derail growth in PVs in particular, the intense waves of the pandemic, and inflationary headwinds in key export markets need watching, the rating agency said.

The rating agency expects the sector’s coverage metrics to remain comfortable in this fiscal, benefitting from healthy accruals and relatively low incremental debt funding requirements.

Signs of tyre export market resurgence for the Indian industry have been manifest in FY22 and it is expected to continue into the next fiscal. Riding on a resurging global growth after two muted years of the Covid-19 pandemic, the Indian tyre industry surpassed INR 21,000 crore in exports in FY22 with about 50% value growth versus last year, an all-time high for the sector. But the billion-dollar question is if the Indian industry is ready to cash in on this opportunity and emerge as a real global player beyond FY23.

After two back-to-back years of earnings surge, the steel companies are now staring at a significant decline in earnings over the next 12 months as the industry faces multiple headwinds emanating from trade barriers from export duty on finished steel, unprecedented coal/energy cost pressures, and muted domestic demand growth so far, Icra said in a report.

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