Operating margins of the Indian auto component sector is expected to moderate by 100-150 basis points this fiscal, from around 12 per cent last year, with the West Asia conflict driving up input prices and freight costs across domestic and overseas markets. Revenue growth, however, is expected to remain resilient, to help keep absolute operating profits stable, according to a Crisil Ratings report.
Demand from original equipment manufacturers (OEMs), the largest contributor to the sector’s revenues, is expected to remain steady, providing underlying support for this revenue momentum. Further, balance sheets, though not debt-free, remain at moderate levels, adequate for fund capital expenditure (capex) and working capital needs.
An analysis of Crisil-rated auto component makers, which accounted for almost half the sector’s revenue of ₹9 lakh crore last fiscal, indicates as much. Last fiscal, OEMs generated over two-thirds of the sector’s revenue, while exports and the aftermarket contributed 16 per cent and 12 per cent, respectively.
Raw materials constitute almost three-fourths of the sector’s total cost. Notably, prices of steel and aluminium, which together account for 50-60 per cent of input costs, have risen sharply.
Anuj Sethi, Senior Director, Crisil Ratings, “Raw materials, employee expenses and power together account for 90 per cent of overall cost structure. Input and energy prices have risen, with minimum wage revisions across several States, adding further pressure. OEMs, accounting for over two-thirds of revenues, typically offer a cost pass-through, though with a lag of one to two quarters and not always in full, thus moderating operating margins by 100-150 bps to 10.5-11 per cent this fiscal. Yet with revenue growth expected at 9-11 per cent, the impact on overall profitability is expected to remain contained.”
Poonam Upadhyay, Director, Crisil Ratings, said, “Capex of auto component players rated by us is expected at ₹27,000 crore this fiscal, up 10 per cent on-year, directed primarily towards capacity expansion, including electric vehicle (EV)-related components, to meet steady OEM demand.”
The duration of the West Asia conflict, the pace of normalisation in energy and freight costs, commodity price movements, and the extent and timing of cost pass-through to OEMs will bear watching, the report said.