Auto component industry profitability under pressure as West Asia conflict pushes margins down to 10.5-11%: Crisil

India's auto component makers are likely to face a margin squeeze this fiscal as rising commodity, energy and freight costs linked to the conflict in West Asia begin to weigh on profitability. According to Crisil Ratings, industry operating margins could decline by 100-150 basis points (bps) to 10.5-11% from around 12% last fiscal, even as revenue growth remains healthy.

The pressure comes at a time when the domestic auto component industry is maintaining growth momentum, aided by steady vehicle demand and ongoing investments in new technologies. Crisil expects sector revenue to rise 9-11% this fiscal, building on an industry size of nearly Rs 9 lakh crore last year. The ratings agency's analysis covers companies accounting for almost half of the sector's revenue.

Rising steel and aluminium prices threaten earnings

The industry's profitability remains highly exposed to movements in raw material prices. Steel and aluminium, which together account for 50-60% of input costs, have witnessed a sharp increase in prices in recent months. Higher energy expenses and wage revisions across several states are adding to the cost burden.

Raw materials, employee expenses and power together make up nearly 90% of the industry's overall cost structure. Although component manufacturers typically receive cost pass-through support from OEMs, these mechanisms often operate with a lag of one to two quarters and may not fully compensate for cost increases.

"Input and energy prices have risen, with minimum wage revisions across several states adding further pressure," said Anuj Sethi, Senior Director, Crisil Ratings.

Vehicle demand and exports offer a cushion

Despite the margin pressure, demand indicators remain favourable. OEMs, which account for more than two-thirds of industry revenue, continue to benefit from new passenger vehicle launches, infrastructure-led commercial vehicle demand, premiumisation in the two-wheeler segment and increasing adoption of electric vehicles.

Exports are expected to grow 8-9% this fiscal, supported by tariff corrections in the United States, India's largest export market. The aftermarket business is also expected to remain resilient, aided by the large base of vehicles sold over the past few years.

Together, these growth drivers are expected to help preserve absolute operating profits even as margins moderate.

Inventory build-up and higher capex to test balance sheets

The conflict in West Asia is also forcing manufacturers to rethink inventory strategies. To safeguard production schedules against supply-chain disruptions, companies are expected to hold larger buffer stocks, increasing inventory levels by 15-20 days from the current 80-85 days.

At the same time, investment activity remains strong. Crisil estimates capex by rated auto component makers at around Rs 27,000 crore this fiscal, up about 10% year-on-year. A significant portion of this spending is being directed towards capacity expansion and EV-related components.

"Capex of auto component players rated by us is expected at ~Rs 27,000 crore this fiscal, directed primarily towards capacity expansion, including EV-related components, to meet steady OEM demand," said Poonam Upadhyay, Director, Crisil Ratings.

Even with higher investments and working capital requirements, the sector's financial position remains relatively comfortable. Interest coverage is expected to remain around seven times, while debt-to-Ebitda is projected at 1.5-1.7 times, suggesting balance sheets remain capable of supporting growth plans.

How long the West Asia conflict persists, and whether elevated freight, energy and commodity costs become structural rather than temporary, will determine the extent of pressure on auto component makers in the coming quarters.