Auto component makers are facing a double whammy of subdued demand and covid-induced production restrictions. The Automotive Component Manufacturers Association of India (ACMA) pegged the industry revenue fall at 11.7% last fiscal year. Hit by falling sales, automakers curtailed orders to auto component suppliers. According to the Society of Indian Automobile Manufacturers (Siam), automobile production dropped 14.7% in FY20.
With automobile industry sales estimated to fall by about one-fifth in the current fiscal year, revenues of the auto component industry may also shrink. Icra Research Services projects 14-18% decline in FY21. Brickwork Ratings, too, estimates a similar fall in revenue.
Noticeably, revenues of auto component manufacturers aren’t falling at the same rate as automobile manufacturers. Exports and replacement sales, which together generate almost half of the industry’s revenue, are withstanding the downturn better. Exports dropped just 3.2%, while domestic aftermarket sales grew 2.8% in FY20, according to ACMA. Consequently, the share of exports and domestic aftermarket sales in the auto component industry’s revenue grew five percentage points to 49% in FY20. Note that ACMA’s figures exclude sales of tyre and battery manufacturers, which have a greater share of revenue coming from the replacement market.
An analysis of the June quarter results of 46 listed auto ancillary companies by Elara Securities (India) Pvt. Ltd shows that firms with higher exposure to replacement sales and export markets were impacted less.
Tyre and battery manufacturers MRF, Apollo Tyres, Balkrishna Industries, Amara Raja Industries and Exide Industries topped the list to report positive operating profit despite the lockdown. “Most auto ancillaries posted negative Ebitda this quarter, except for Timken India, Balkrishna Industries, Endurance Technologies and Sundram Fasteners, which posted positive Ebitda,” Elara Securities analysts said in a note. Ebitda is earnings before interest, taxes, depreciation and amortization.
Some firms, such as Minda Industries and Endurance Technologies, are benefiting from order wins in new product segments and growing demand for alloy wheels. Of course, the industry will always have outliers and underperformers. The slow recovery in the global automobile industry can pose risks to export revenues. Lockdowns and loss of sales are already exerting liquidity pressures on micro, small, and medium auto component makers.
In March 2019, only 1% of auto component firms covered by Icra had a negative rating outlook; this has increased to an all-time high of 24% in August. “Liquidity is critical. Supply chain may suffer as several tier II and all tier III (auto component makers) face pressure. Stress in MSMEs will impact the last leg of the supply chain, adding to overall costs for the sector,” Icra said in a note.