Auto ancillaries under pressure from Omicron wave, commodity inflation: ICRA

Commodity price and other input costs like freight have witnessed sharp increase in the last 3-4 quarters, and auto ancillaries have not been able to pass through entirely, resulting in significant decline in gross margins.

The operating margins shrunk by 240 bps to 10.6 percent in Q2 FY2022. Given the anticipation of elevated commodity prices in H2 FY2022 as well, the gross margins of auto ancillaries will be lower on YoY basis in FY2022.

The revenue growth forecast for FY2022 has also been revised southwards by 200 bps to 15-17 percent from the earlier estimates due to the ongoing Omicron wave, delayed recovery in semi-conductors and muted 2W/bus demand.

According to ICRA, the 15-17 percent revenue growth for the auto component industry will be driven by domestic original equipment manufacturer (OEM) replacement, export volumes and pass-through of commodity prices.

The volume growth would, however, come on a low base of FY2021. Going forward, revenues in Q3 and Q4 FY2022 are expected to remain relatively muted on YoY basis, with supply chain issues lasting longer than previously expected.

Notwithstanding the potential Omicron impact, ICRA estimates an 8-10 percent growth in domestic aftermarket demand for FY2022.

Easing of Covid 2.0 related lockdown restrictions and improvement in personal mobility, healthy freight movement and pent-up demand arising from deferment of purchases last year supported replacement sales for auto components in Q2 and Q3 FY2022.

Freight movement and deferment of fresh vehicle purchases will result in healthy replacement demand in Q4 FY2022.

Exports remain a bright spot in the Indian auto component story with ICRA estimating a 20 percent+ growth in exports for FY2022.

Indian auto component suppliers have reported a healthy improvement in sales volumes to Europe in year-to-date FY2022 and have a strong order book for the next few months, partly aided by the China plus 1 strategy.

Relatively high infections and prolonged lockdowns in India’s key export markets like Europe and USA remains a downside risk.

According to ICRA, most of the auto ancillaries are re-evaluating investment plans in the backdrop of the recently announced PLI scheme.

At present, the incremental announced investments are primarily towards capability development i.e. new product additions and committed platforms, unlike the investments towards capacity expansion witnessed in the past.

On the flip side, over the long term, premiumization of vehicles and focus on localisation will translate into relatively stronger growth for auto component suppliers, reports ICRA which forecasts a 5-year CAGR of 8-10 percent for the industry.