Auto component suppliers are set to witness over 70 per cent decline in operating profits in Q1 FY2022 due to COVID 2.0 lockdown restrictions, said a latest report by rating agency ICRA.
However, it said, adequate liquidity across most auto component suppliers will help them to tide over the lockdown restrictions; exports provided the much-needed support.
For ICRA’s rated portfolio, the median FoS (with three months of nil revenues) was healthy, indicating sufficient liquidity to tide over the current crisis.
In line with the swift recovery in automobile demand in H2 FY2021, earnings of auto component manufacturers also started improving. Most auto component suppliers registered their highest ever revenues during Q4 FY2021. The improved liquidity profile across auto component suppliers was also evident from the fact that none of the ICRA-rated investment grade auto component suppliers opted for restructuring in Q3 FY2021.
The recent disruption caused by COVID is likely to derail the momentum owing to disruption in operations, starting from April 2021. The challenges for component manufacturers will be further compounded by the sharp increase in commodity prices, which are generally passed through to OEMs with a lag of three to six months. However, adequate liquidity across most of our rated investment grade auto component suppliers should help them to tide over pandemic-related headwinds.
Throwing more light, Ms. Vinutaa S, Assistant Vice-President and Sector Head, ICRA Limited, said, “We carried out a liquidity assessment using ‘Factor of Safety’ analysis, which reflects the company’s ability to service its liabilities and fixed expenses through existing resources without generating any revenues for three months. The median FoS for 125 ICRA-rated Auto component suppliers is close to six months, indicating sufficient liquidity in the industry to tide over the current crisis. For entities in the AAA, AA, A and BBB categories in ICRA’s rated portfolio, the FoS stood at 19.6 times, 8.7 times, 6.4 times and 3.5 times respectively. Further, relatively strong capitalisation in the higher rating categories provides companies with flexibility to increase leverage should there be a need.”
While the production volumes were stable in April 2021, retail sales declined sharply during the last two months indicating inventory build-up in the system. Industry volumes are expected to remain muted in June 2021 as well, with many OEMs and suppliers currently operating in single shifts. The industry is also witnessing pressure on the raw materials front, impacted by the record-high commodity prices. Commodity prices are expected to remain elevated in H1 FY2022, before softening in H2 FY2022. However, the current year’s average commodity prices are expected to be at a multi-year high. Another cause of concern is the shortage of electronic components and increase in semi-conductor prices.