In­dian auto com­po­nent in­dus­try grows 13% in FY2018: ICRA

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Rid­ing strong vol­ume growth across au­to­mo­tive seg­ments, in par­tic­u­lar, from the au­to­mo­tive Orig­i­nal Equip­ment Man­u­fac­tur­ers (OEMs), ICRA’s sam­ple of the In­dian auto com­po­nent in­dus­try grew by 13% dur­ing FY2018. OEM de­mand growth was un­der­pinned by ris­ing ru­ral in­come, re­cov­ery in medium and heavy com­mer­cial ve­hi­cles (M&HCV) de­mand post-GST, stricter over­load­ing re­stric­tions and pick up in in­fras­truc­ture ac­tiv­ity.

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 about 10% vol­ume growth dur­ing FY2019, sup­ported by fur­ther im­prove­ment in ru­ral in­come, higher dis­pos­able in­come with an­tic­i­pated pay re­vi­sions by some states and con­tin­ued in­fras­truc­ture ac­tiv­ity.”

Ac­cord­ing to ICRA, the do­mes­tic af­ter­mar­ket seg­ment (bar­ring bat­tery and tyres) wit­nessed a flat rev­enue growth dur­ing FY18 as GST im­ple­men­ta­tion im­pacted the dealer-dis­trib­u­tor sup­ply chain. The higher share of the re­place­ment mar­ket has been con­sol­i­dated with large or­gan­ised play­ers dur­ing the last year. The re­port fur­ther states that the tyre and bat­tery seg­ment wit­nessed healthy re­place­ment de­mand dur­ing FY18 with truck and bus (T&B) tyre re­place­ment de­mand grow­ing after 3 years of muted de­mand. Thus, the af­ter­mar­ket de­mand re­cov­ered in Q4 FY2018 and is likely to wit­ness an 8-12% growth dur­ing FY2019.

The re­port states that the trend in ex­ports was mixed with the 2 largest mar­kets for In­dian auto com­po­nents ex­ports, the USA and Europe, ac­count­ing for about 60% of sec­tor’s ex­ports. Sales trend in those 2 mar­kets have al­ways re­mained crit­i­cal for the In­dian in­dus­try. The ICRA sam­ple also notes that dur­ing CY2017, the US M&HCV de­mand re­mained strong, even as light ve­hi­cle (PV and pick­ups) sales in the USA and CV/PV sales in Europe wit­nessed muted growth. The heavy truck (class-8) sales in the US is likely to con­tinue to re­main strong in CY2018 and light ve­hi­cle sales is ex­pected to de­cline, lower than the de­cline of CY2017.

As per in­dus­try ex­perts, any im­po­si­tion of puni­tive im­port tar­iffs by the US, like the cur­rent un­der-re­view process, would re­sult in in­creased costs and dis­rup­tion of the sup­ply chain for In­dian ex­porters. The au­to­mo­tive en­vi­ron­ment in Europe is likely to re­main slug­gish in CY2018.

In spite of ris­ing raw ma­te­rial costs dur­ing FY2018, ICRA’s weighted av­er­age ma­te­rial cost in­dex re­bounded to FY2015 lev­els in FY2018, with a sharp rise in prices of all key com­modi­ties over the last 6 months (ex­cept for rub­ber). In­dian steel prices rose by about 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 18-20% in­crease in price of th­ese 2 com­modi­ties dur­ing FY2018. The prices of th­ese 3 com­modi­ties are likely to re­main high in FY2019 as well, ac­cord­ing to ICRA. For alu­minium, the agency ob­serves that the global prices would still be in­flu­enced by the clo­sure of Vedanta’s Tu­ti­corin cop­per plant and the US sanc­tions on United Com­pany RUSAL, Rus­sia.

ICRA’s sam­ple com­pris­ing of 48 com­pa­nies re­ported a ro­bust top line growth of 21.1% dur­ing Q4 FY2018 due to healthy vol­ume growth and higher re­al­i­sa­tions, which helped off­set ris­ing prices of raw ma­te­ri­als. Tyre com­pa­nies wit­nessed a growth of 15.4% in Q4 FY2018 due to 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. ICRA has noted that the op­er­at­ing mar­gins 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%).

ICRA re­ports that the in­dus­try play­ers have an­nounced capex of over Rs 10,500 crore (ex-bat­ter­ies and tyres), which is backed by im­prove­ments wit­nessed in ca­pac­ity util­i­sa­tion dur­ing H2 FY2018 and an­tic­i­pated de­mand growth over the medium term. The re­port fur­ther states that the tyre in­dus­try con­tin­ues to in­vest in ra­dial tyre ca­pac­i­ties while bat­tery man­u­fac­tur­ers are in­vest­ing in two-wheeler and four-wheeler ca­pac­i­ties.

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