The growth forecast has been revised down 300 basis points from previous estimates due to the impact of the semiconductor shortage on domestic OEMs and export revenues, ICRA said in his report.
He also noted that the operating profit margin (OPM) of auto accessories (excluding tires) will remain below normal levels (FY20). The industry’s unusually weak performance in the first quarter of FY21 due to strict foreclosure weighed on last year’s profit margins, he added.
Underlying demand remains strong, although near-term supply chain challenges and commodity inflation persist, according to Vinutaa S, ICRA’s deputy vice president.
“Although sequential moderation is likely, most domestic OE segments are expected to experience healthy demand in FY22, with the preference for personal mobility and the resumption of infra activity driving growth. The pent-up demand and increased economic activity will support secondary market income. . Part of the income growth would also come from the transmission of commodities. “
She added that the export order book, both to the United States and Europe, remains healthy. However, the continuation of the trend remains to be seen, given the semiconductor shortage.
In the long run, the premiumization of vehicles and the focus on localization will translate into relatively stronger growth for automotive suppliers.Vinutaa S, Assistant Vice-President, ICRA
“In the long term, the premiumization of vehicles and the focus on localization will translate into relatively stronger growth for automotive component suppliers,” added Vinutaa.
The rating agency expects operating margins to improve sequentially in the second quarter of FY22, following a loss of revenue in the first quarter of FY22 and negative operating leverage that weighed on operating profits. Over 85% of sample entities witnessed a QoQ reduction in the proportion of resource management costs, aided by commodity pass-through, in the first quarter of fiscal 22, which limited the decline to some extent, according to the ICRA.
The benefits of operating leverage and passing products to OEMs will translate into better OPM, despite some production losses due to supply chain issues. However, the OPM will remain below the pre-covid level of around 14% due to several headwinds, he noted.
Liquidity situation and investment plans
According to the rating agency, the liquidity position remains comfortable between level I and II players. ICRA mentioned that the former have used their cash flow from the upcycle cycle to develop new product capabilities and should be more resilient. In terms of additional investments, the recently announced PLI program bodes well for the industry.
CIFAR’s interaction with industry participants indicates that most of them are reassessing investment plans.
“Since most Tier I vendors are eligible, the capital expenditure intensity is likely to increase significantly from the current estimate of 5.5% to 6%. INR 12,500 crore. Nonetheless, it will always remain below the Capex FY20 of INR 18,200 crore, “he added.
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