Auto Component Industry Revenues to Decline by 14-18 % in FY21, says ICRA

Auto Component Industry Revenues to Decline by 14-18 % in FY21, says ICRA

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ICRA research expects the recovery to be gradual and slow-paced, with the industry pinning hopes on revival in rural income to support growth in the festive season and thereafter

The automotive industry has been affected by the pandemic and continuing lockdowns are directly impacting the economic environment as well as consumer sentiments. Domestic automotive production declined by ~14.7% in FY20 and is expected to witness double-digit decline in FY21 as well. Driven by weak demand across domestic OEM, replacement market and exports, the domestic auto component sector’s revenues are estimated to decline by 14-18 % in FY21.

Automobile volumes are expected to decline by ~15-16 % in FY21; within this passenger vehicle demand will decline by 22 % to 25 %. The year will be tough for the commercial vehicles too, given the slowing economic growth, current overcapacity in the CV space and tight financing environment amidst price increases due to transition to BS 6 emission norms. However, two wheeler sales could benefit as people prefer personal transport and are wary of public transport, easy retail credit availability; and expectations of better demand in rural and semi urban markets, which were relatively less impacted by the COVID-19 pandemic and resulting restrictions.

ICRA notes that the aftermarket performance during FY20 was impacted due to continued credit crunch across the channel inventory, tight financing environment and overall economic slowdown leading to lower vehicle movement. Further, nearly 45 days of sales were lost in Q1 FY21 because of lockdown; the weakness was felt for the rest of Q1 FY21. The liquidity in the market is tight and consolidation in the aftermarket space, with some smaller retailers facing insolvency is expected. Overall, FY2021 is expected to be sluggish for the aftermarket.

On a positive note, accommodative commodity prices will buffer the impact of negative operating leverage to an extent. Commodity prices across all commodities are expected to remain soft in FY21. The factors that will negatively impact commodity prices are domestic demand uncertainty, with weak auto and infrastructure outlook and pandemic effect. The big case in point is the unprecedented 68.5 % drop in steel demand on Y-o-Y basis in Apr-May'20 which is expected to contract by 20-25 % in full year, FY21.

Subrata Ray, Senior Group Vice-President, ICRA, said further downward revision linked to pandemic related impact and consumer demand in both domestic and international markets is possible and revenue decline of 14-18 % in FY21 is expected, over and above the sharp 13-15 % decline in FY20.

COMPONENT INDUSTRY FINANCIALS

Coming to financials, revenue of ICRA’s auto component sample set (ex-Tyres) declined by 19.9% in Q4 FY20, the steepest quarterly Y-o-Y decline in the last several years. For FY20, revenues declined by 12.3 % Y-o-Y. The slowdown was far steeper than that during FY2008. However auto ancillaries with focus on exports were less impacted. Prevailing conditions in Q1 FY21 is expected to lead to a sharp decline in the quarter. Despite weak demand, decline in OPMs was capped at 130 bps, from 14.4 % in Q4 FY2019 to 13.1 % in Q4 FY20, supported by accommodative commodity prices, cost reduction initiatives taken by companies and largely favourable forex movements (for net importers). The FY20 OPMs was down 70 bps Y-o-Y to 13.2 %. In Q1 and Q2 of FY21, soft commodity prices and various cost-saving initiatives like temporary pay cuts and consolidation of operations are likely to cap the margin compression.

In the past few years, strong cash accruals and low leverage for auto ancillaries, despite the sizeable capex has kept the interest coverage metrics in a healthy state. However, lower operating profits have weakened the interest cover in FY2020. Interest coverage is likely to be weaker in Q1 FY21 and Q2 FY21, as the industry battles against the pandemic induced demand slowdown. Overall, credit metrics of component manufacturers have been impacted in FY21, the pressure is visible across the value chain. The smaller tier-II and IIIs are more impacted, given their limited financial flexibility.

Given steep pressure on profitability and cash flows, incremental capex has come to standstill with the focus being only on absolutely necessary capex i.e. maintenance and confirmed order related investments. The industry is likely to witness an ~40 % Y-o-Y decline in capex/investment during FY21, with capex for auto ancillaries expected to fall below 5 % of revenues for the first time in last 10 years.