Auto ancillary sector gets an upgrade; FY23 growth to remain in double digits

The Indian automobile sector had a devastating first year under the Covid-19 pandemic with poor sales sentiment and supply chain disruption impacting business. This also had a domino effect on the ancillary industry, and demand for auto components fell in the year ended March 2021.

However, with growth pegged at over 20% in the 12 months ending March 31, 2022, the auto component industry has recorded a smart recovery.

Now, India Ratings and Research (Ind-Ra), which is affiliated to Fitch, has revised its growth estimates for the fiscal year and also upgraded the outlook for the auto ancillary sector to ‘neutral’ for FY23 from ‘improving’.

Ind-Ra said it expects the sector revenue to grow 10-15% year-on-year in the coming year and estimates growth at 20-25% for FY22.

Interestingly, Ind-Ra had said a year ago that it expected growth to be in the 12-15% range for FY22 and later revised this upwards to 18-20% in a note circulated in September 2021.

Th ratings firm said the future business will be supported by moderate growth of 5-9% in original equipment manufacturers’ volumes and continued healthy exports.

“Demand from the aftermarket is likely to provide a steady contribution. In addition to the volume growth, the realisations would be aided by the full-year impact of higher selling prices, as higher raw material prices in FY22 would largely be passed on by early FY23, and a continued increase in the sales to the medium and heavy commercial vehicles segment which are of a higher value than other segments,” Ind-Ra said.

Profit margins

The firm expects profitability margins to remain flat to increasing marginally in FY23, as better operating leverage would be offset by firm commodity prices (such as steel, aluminium, copper, crude derivatives), continued supply chain issues (though somewhat softened) and increased logistics cost due to higher fuel prices.

Ind-Ra said it estimates the sector margins to decline by 100-120 basis points in FY22. The sector performance remains exposed to downside risks, including those from evolving geopolitical tensions and any subsequent COVID-19 waves, it said.

The ratings firm also said it believes that the emphasis would remain on sweating assets to boost return ratios.

“However, capex is expected to be higher in FY23 in lieu of the onset of capex under the auto component and advanced chemistry cell batteries production-linked incentives schemes. The sector’s renewed focus on investments in R&D, technological tie-ups and/or inorganic acquisitions would continue in the near-to-medium term,” Ind-Ra said.

The firm has maintained a stable outlook for its rated portfolio of issuers in the auto ancillary sector for FY23. After two successive years of downgrades exceeding upgrades, the frequency of downgrades has mellowed in FY22 and Ind-Ra expects the same to remain so for the coming fiscal year.