Indian auto component industry grows 13% in FY2018: ICRA

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.