Business News
3 min read | Updated on July 11, 2024, 18:46 IST
SUMMARY
The ratings agency said these growth projections are based on the sample of 46 auto ancillaries with aggregate annual revenues of over ₹3,00,000 crore in FY2024.
Red Sea crisis is likely to impact the margins of the auto component industry
The Red Sea crisis is likely to impact the margins of the auto component industry over the next few quarters amid higher container rates and shipping time, credit ratings agency ICRA said on Thursday, projecting moderate growth for the industry this fiscal.
Close to two-thirds of the auto component exports are made to North America and Europe, and one-third of the imports are made from these regions, as per the ratings agency.
"The disruption along the Red Sea route has resulted in a surge in container rates by 2-3 times in YTD (year-to-date) this calendar year compared to CY2023, while shipping time has also increased by around two weeks," ICRA said.
The operating margins are set for a year-on-year improvement of around 50 basis points in FY2025, benefitting from better operating leverage, higher content per vehicle, and value additions, while remaining exposed to any sharp volatility in commodity prices and foreign exchange rates, it said.
Also, the industry's liquidity position, according to ICRA, remains comfortable, especially across tier-I players supported by stable cash flows and earnings.
ICRA said it expects the growth in revenues of the Indian auto component industry to ease to 5-7% this fiscal, from the highs of around 14% in FY 2023-24.
"Demand from domestic original equipment manufacturers (OEM) constitutes over 50% of sales for the Indian auto component industry and the pace of growth in the segment is expected to moderate in FY2025," said Details, Vinutaa S, Vice President and Sector Head for corporate ratings at ICRA Limited.
The ratings agency said these growth projections are based on the sample of 46 auto ancillaries with aggregate annual revenues of over ₹3,00,000 crore in FY2024.
The aging of vehicles and increased sales of used vehicles in global markets are also expected to aid in the export of components for the replacement segment in overseas markets, according to the ratings agency.
On investments by auto component suppliers, Vinutaa added, "ICRA's interaction with large auto component suppliers indicates that the industry has incurred a capex of over ₹20,000 crore in FY2024 and is estimated to spend another ₹ 20,000 to ₹25,000 crore in FY2025."
The incremental investments would be made towards new products, product development for committed platforms, and development of advanced technology and EV components, apart from capex for capacity enhancements and upcoming regulatory changes.
ICRA said it expects auto ancillaries' capex to hover around 8-10% of operating income over the medium term, with the PLI scheme also contributing to accelerating capex towards advanced technology and EV components."
The EV policy 2024 for electric four-wheelers would also help generate incremental demand for component makers, because of the domestic value addition mandated, according to the ratings agency.
ICRA also expects opportunities for ancillaries in manufacturing components from other alternative fuel vehicles, as their penetration increases, and expects EVs to account for around 25% of domestic two-wheeler sales and 15% of passenger vehicle sales by 2030.
This would translate into a strong market potential for EV components by 2030, it stated.
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