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Auto Component Industry grew by 13pct in FY2018 - ICRA

Auto News - Published on Wed, 11 Jul 2018

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Riding strong volume growth across automotive segments, in particular, from the automotive Original Equipment (OE) manufacturers, ICRA’s sample of the Indian auto component industry grew by 13 per cent during FY2018. OE demand growth was underpinned by rising rural income, recovery in Medium & Heavy Commercial Vehicles (M&HCV) demand post-GST, stricter overloading restrictions and pickup in infrastructure activity.

Mr Subrata Ray, Senior Group Vice President, Corporate Sector ratings, ICRA, said, "Based on the available trends so far, we expect the domestic OEM segment to witness a broad-based 10 per cent volume growth during FY 2019, supported by a further improvement in rural income, higher disposable income with anticipated pay revisions by some states and continued infrastructure activity."

The domestic aftermarket segment (barring battery and tyres) witnessed flattish revenue growth during FY18 as GST implementation impacted the dealer-distributor supply chain. Nevertheless, higher share of the replacement market has consolidated with large organised players during the last year.

The Tyre and Battery segment witnessed healthy replacement demand during FY18 with truck and bus (T&B) tyre replacement demand growing during FY18, post over three years of muted demand. The aftermarket demand recovered in Q4 FY2018 and is likely to witness an 8-12% growth during FY2019.

The trend in exports was mixed. The two largest markets for Indian auto components exports are the USA and Europe, accounting for about 60% of sector’s exports. Sales trend in these two markets have always remained critical for auto ancillaries in India. During CY2017, the US M&HCV demand remained strong, even as light vehicle (PV and pick-ups) sales in the USA and CV/PV sales in Europe witnessed muted growth.

While heavy truck (class-8) sales in the US is likely to continue to remain strong in CY2018, light vehicle sales is expected to decline, albeit lower than the decline of CY2017. Further, any imposition of punitive import tariffs by the USA, like the current under-review process, would result in increased costs and disruption of supply chain for Indian exporters. The automotive environment in Europe is likely to remain sluggish in CY2018.

The industry was affected by rising raw material costs during FY2018. ICRA’s weighted average material cost index rebounded to FY2015 levels in FY2018, with sharp rise in prices of all key commodities over the last six months (except for rubber). Indian steel prices rose by 17% in FY2018, following an increase in global steel prices.

Lower supply of aluminium from China and subdued copper production in Chile resulted in an 18 per cent and 20 per cent increase in price of these two commodities during FY2018. The prices of these three commodities are likely to remain high in FY2019 as well. Apart from other global factors, the closure of Vedanta’s Tuticorin copper plant and the US sanctions on United Company RUSAL, Russia which accounts for sizable global aluminium supplies, will influence prices.

ICRA's sample comprising of 48 companies reported a robust top line growth of 21.1% during Q4 FY2018, aided by healthy volume growth and higher realisations, which helped offset raw materials price increases.

Tyre companies witnessed a growth of 15.4% in Q4 FY2018 backed by strong demand, despite relatively stable rubber prices; while battery manufacturers gained from healthy off-take and price hikes taken to pass-on lead price increases. Operating margins of ICRA’s sample stood at 15.1% for Q4 FY2018 (from 14.2% in Q4 FY2017), supported by margin expansion in the tyre segment (by 330 bps to 14.9%), increasing share of margin-accretive replacement sales and scale benefits. Ex-tyre, ICRA’s sample reported a marginal decline of 20 bps in operating margins to 15.1% in Q4 FY2018.

The credit profile of auto ancillaries remains stable, supported by strong accruals and modest capex of the last few years. The interest coverage indicators of most auto ancillaries continue to remain strong, supported by the low debt levels

Industry players have announced capex of over Rs 10,500 crore (ex-batteries and tyres). This follows improvements witnessed in capacity utilisation during H2 FY2018 and anticipated demand growth over the medium term. The tyre industry continues to invest in radial tyre capacities while battery manufacturers are investing in two-wheeler and four-wheeler capacities.

Further, several auto ancillaries continue to explore inorganic growth opportunities in India and in the overseas markets, as evidenced by increasing M&A activity, given their strong cash position. Also, despite the healthy credit profile, several companies are undertaking fund raising (through QIPs and IPO) to provide an exit to earlier investors and raising growth money.

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Posted By : Rabi Wangkhem on Wed, 11 Jul 2018
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