Revenues of auto ancillaries sector is expected to register a growth by 8-10%, suggests a study by ratings agency ICRA, where it sampled the cumulative revenues of 31 auto component companies. It primarily cites stable demand and the likely easing of supply-chain related concerns in the second half of FY2023. The industry is also expected to benefit from healthy accruals and relatively low incremental debt funding requirements.
Albeit the growth came on a relatively low base of FY2021, it superseded the estimates—driven by domestic OEM, replacement, better-than-expected export volumes and pass-through of commodity prices. “We expect auto ancillaries’ revenues to grow—supported by stable demand as well as the expected easing of supply-chain related issues in H2 FY2023. Over the long term, premiumisation of vehicles, focus on localisation, improved exports potential and EV opportunities, resulting in higher content per vehicle, would translate to healthy growth for auto component suppliers, in our view. Auto ancillaries have displayed adequate liquidity position, especially across tier-I and tier-II players,” tells Vinutaa S, vice president and sector head, ICRA.
Vinutaa further explains that the estimated revenue growth for FY2022 was constrained by factors like semiconductor shortage issues, muted two-wheeler and tractor demand, and the impact of geopolitical developments on international business. ICRA’s estimation of operating margins for FY2022 had factored operating leverage benefits. However, the unprecedented inflation in raw material costs and freight costs in H2 FY2022 and inability to pass on the same completely and in a timely manner impacted the profit margins in FY2022. Operating margins for the sample in FY2022 were the lowest in the last five years. “Yet, the industry’s actual revenues were supported by healthy exports and better realisations. ICRA’s sample of 30 companies (excluding a large auto component supplier) reported operating margins of 10.6% for FY2022, 10 bps lower on a year-to-year basis, and 40 bps lower than projections,” she adds.
Uncertainties on the supply-chain front and cost inflation resulted in auto ancillaries stocking higher inventory, with inventory levels for the sample being the highest as of March 31, 2022, compared to the last four years. The auto ancillaries and components industry transitioned from a just-in-time model to a just-in-case model—where higher levels of inventory were maintained to keep up with the erratic production schedule of OEMs. Notwithstanding, the working capital intensity remains comfortable, at sub 10% levels.
The capex spend of the auto ancillary sample for FY2022, as a proportion of their operating income, was 5.9%--lower than the pre-pandemic levels of more than 7.5%. However, ICRA claims that it was in line with its estimates. The incremental investments have been primarily towards capability development i.e., new product additions, product development for committed platforms, and development of advanced technological and EV components—unlike investments towards capacity expansion witnessed in the past. Going forward, the recently announced PLI scheme will contribute to accelerating capex over the medium-term besides investments by new entrants in the EV segment.
Most auto ancillaries rated by ICRA are in investment grade, reflecting a healthy credit profile. There were more upgrades than downgrades in FY2022—stemming from healthy cash accruals and steady decline in debt levels. This was, in turn, supported by improved demand, increase in market share, superior product mix and strengthening of business profile among other reasons.