Component industry posts smart recovery in June quarter: ICRA

The domestic auto component industry witnessed smart recovery during the quarter ended June 2021 driven by strong exports and revival of domestic demand in June 2021, according to ICRA.

The rating agency’s sample of 50 auto component suppliers witnessed a strong revenue growth of 140% Y-o-Y, albeit on a low base of Q1 FY2021.

Despite the COVID 2.0 restrictions, the overall decline in Q1 FY2022 was restricted to 19 per cent on Q-o-Q basis, in contrast to ICRA’s earlier estimate of Q-o-Q decline of 30-35 per cent. The revenue decline for aftermarket-dependent components like tyres and batteries was capped at 13 pc, as against a steeper 19 pc decline for the broader sample.

Most domestic automobile sub-segments, especially passenger-vehicle (PV) and tractors continue to witness strong demand and are almost at pre-COVID levels. The M&HCV segment, which was impacted during Q1 FY2022, is also now showing signs of recovery. ICRA expects the PV, 2W and CV segments to report healthy double-digit growth in FY2022.

Commenting on the near to medium-term trends, Mr. Ashish Modani, Sector Head and Vice President – Corporate Ratings, ICRA, said, “We expect the industry to witness 20-23 pc revenue growth during FY2022, supported by recovery in the domestic automobile industry and robust exports. The pass-through of increase in commodity prices will also add to the revenue growth. The industry gross margins improved sequentially in Q1 FY2022, but remain lower than the historical trend. The shortage of semi-conductor and increase in commodity prices remain key challenges for the industry in the near-term.”

One of the concerns for the industry is the prices of key commodities which continue to remain at elevated level, despite some moderation in recent months. Auto component suppliers usually pass on the impact of commodity price increases to OEMs with a lag of 1-2 quarters. The recent trend also suggests that auto component suppliers have gradually passed on the hike in commodity prices to their customers, as reflected in the sequential improvement in gross margin.

The shortage of semi-conductors remains another key concern for the industry. The automotive industry accounts for 11 pc of global semi-conductor demand. Stronger-than-expected recovery along with supply disruption at some semiconductor manufacturing facilities has aggravated chip shortage issues globally.

On the financial performance, while most auto component suppliers witnessed sequential decline in operating margin due to impact of COVID 2.0 on overall revenues, over 85 per cent entities in ICRA’s sample witnessed Q-o-Q reduction in RM cost proportion during Q1 FY2022 which partially supported profit margins.

Select auto component suppliers registered Q-o-Q improvement in revenue, supported by healthy exports and improved demand in the key end user industries.