CRISIL expects the Rs 3.5 lakh crore automotive components sector to log a 5-7% compound annual growth rate (CAGR) over fiscals 2020 and 2021, down from 12% in the preceding two fiscals, due to a steep decline in domestic vehicles sales.
Production volume of original equipment manufacturers (OEMs) is estimated to either degrow or log low single-digit growth at best in the next two years. Higher insurance costs, lower availability of finance and low growth in rural wages is affecting off-take in fiscal 2020.
Vehicle demand is also expected to be impacted by the new safety norms for passenger vehicles and two-wheelers, applicable in fiscal 2020, and the Bharat Stage (BS) VI emission norms, which come into effect from April 1, 2020, as these will drive up vehicle prices across categories.
These factors are affecting new vehicle sales and in turn causing a telling impact on the automotive component sector, as OEMs account for 65% of component demand.
That being said, the new safety and emission norms do offer a ray of hope to component manufacturers as these will increase the component content in vehicles.
Says Hetal Gandhi, Director, CRISIL Research, “The upcoming safety and emission norms will boost demand for components such as air bags, engine systems, exhaust management systems, and electronic and electrical parts. These new regulations alone are expected to account for 25-30% of the incremental demand for automotive components in the next two fiscals. Indeed, growth in fiscal 2020 and 2021 would be even lower, but for the higher component intensity resulting from the regulatory changes, besides steady aftermarket sales and healthy exports.”
Aftermarket demand (~16% of sector revenue) is expected to maintain the trend of 7-8% growth.
Exports (~19% of sector revenue) are likely to grow at 10-12% in fiscals 2020 and 2021, well below the 18% seen in the preceding two fiscals, because of lower demand in traditional markets such as the US and Europe. Exports will still be healthy, with players expanding beyond these traditional markets. Besides, BS-VI compliance will allow them to penetrate deeper into geographies with similar regulatory requirements
Operating profitability, however, is likely to decline 100-150 basis points to ~11% over the two fiscals following lower revenue growth and rising employee, power and freight costs.
Nevertheless, credit quality for most automotive component firms is expected to be supported by lower capital spending and improved balance sheets.
As they navigate the challenging business environment, component firms are likely to prune capital expenditure (capex). An analysis of ~300 CRISIL-rated component firms, which account for almost 40% of the industry’s revenues, reveals that capex spend will be discretionary and could be ~15% lower at Rs 12,000 crore in fiscals 2020 and 2021, compared with the preceding two fiscals.
Says Aparna Kirubakaran, Associate Director, CRISIL Ratings, “Most component firms have strengthened their balance sheets significantly in the past 3-4 years, and average gearing (debt/ net worth) stood at around 1 time in fiscal 2019, the lowest in a decade. That, coupled with lower capex spend, will limit material impact on credit profiles.” “However, credit profiles of firms with limited segmental and geographical diversification, or those highly dependent on single customer segments, are likely to be vulnerable, more so if they have recently undertaken large debt-funded capex, added Ms. Kirubakaran.