Mumbai: The Red Sea crisis is likely to hit auto components industry margins in the coming quarters amid higher container rates and shipping times, credit rating agency ICRA said on Thursday, projecting moderate growth for the industry in this fiscal year.
According to the rating agency, about two-thirds of auto component exports are to North America and Europe, and one-third of imports are from these regions.
"The disruption along the Red Sea route has resulted in container rates increasing by 2 to 3 times so far this calendar year compared to calendar year 2023, while shipping times have also has increased in about two weeks," ICRA said.
Operating margins are expected to see a year-over-year improvement of around 50 basis points in fiscal 2025, benefiting from improved operating leverage, higher content per vehicle and value additions, while remaining exposed to any strong volatility in vehicle prices. raw materials and currencies. fees, he said.
Additionally, the industry's liquidity position, according to ICRA, remains comfortable, especially among Tier I players backed by stable cash flows and earnings.
ICRA said it expects the Indian auto components industry's revenue growth to slow to 5-7 per cent in this fiscal year, from highs of around 14 per cent in fiscal 2023-24.
"Demand from domestic original equipment manufacturers (OEMs) constitutes more than 50 per cent of the Indian auto components industry's sales and the pace of growth in the segment is expected to moderate in fiscal 2025," said Details, Vinutaa S, vice president and sector head. for corporate ratings at ICRA Limited.
The rating agency said these growth projections are based on a sample of 46 auto ancillaries with aggregate annual revenues of over Rs 300 billion in fiscal 2024.
According to the rating agency, aging vehicles and increasing sales of used vehicles in global markets are also expected to contribute to the export of components for the spare parts segment in foreign markets.
On investments by auto component suppliers, Vinutaa added, “ICRA's interaction with large auto component suppliers indicates that the industry has incurred capital expenditure of over Rs 20,000 crore in FY2024. and is estimated to spend another Rs 20,000-25,000 crore in fiscal 2025.”
Incremental investments would be made in new products, product development for committed platforms and development of advanced technology and electric vehicle components, in addition to capital expenditure for capacity improvements and upcoming regulatory changes.
ICRA said it expects capital expenditure on automotive ancillaries to be around 8-10 per cent of operating income in the medium term, and the PLI scheme will also contribute to accelerating capital expenditure towards advanced technology and electric vehicle components. ".
The 2024 EV policy for electric four-wheelers would also help generate incremental demand for component manufacturers, due to the domestic value addition required, according to the rating agency.
ICRA also expects opportunities for auxiliary manufacturing of components of other alternative fuel vehicles, as their penetration increases, and expects electric vehicles to account for around 25 per cent of domestic two-wheeler sales and 15 per cent. percent of passenger vehicle sales by 2030.
This would translate into strong market potential for electric vehicle components by 2030, he said.
According to the rating agency, about two-thirds of auto component exports are to North America and Europe, and one-third of imports are from these regions.
"The disruption along the Red Sea route has resulted in container rates increasing by 2 to 3 times so far this calendar year compared to calendar year 2023, while shipping times have also has increased in about two weeks," ICRA said.
Operating margins are expected to see a year-over-year improvement of around 50 basis points in fiscal 2025, benefiting from improved operating leverage, higher content per vehicle and value additions, while remaining exposed to any strong volatility in vehicle prices. raw materials and currencies. fees, he said.
Additionally, the industry's liquidity position, according to ICRA, remains comfortable, especially among Tier I players backed by stable cash flows and earnings.
ICRA said it expects the Indian auto components industry's revenue growth to slow to 5-7 per cent in this fiscal year, from highs of around 14 per cent in fiscal 2023-24.
"Demand from domestic original equipment manufacturers (OEMs) constitutes more than 50 per cent of the Indian auto components industry's sales and the pace of growth in the segment is expected to moderate in fiscal 2025," said Details, Vinutaa S, vice president and sector head. for corporate ratings at ICRA Limited.
The rating agency said these growth projections are based on a sample of 46 auto ancillaries with aggregate annual revenues of over Rs 300 billion in fiscal 2024.
According to the rating agency, aging vehicles and increasing sales of used vehicles in global markets are also expected to contribute to the export of components for the spare parts segment in foreign markets.
On investments by auto component suppliers, Vinutaa added, “ICRA's interaction with large auto component suppliers indicates that the industry has incurred capital expenditure of over Rs 20,000 crore in FY2024. and is estimated to spend another Rs 20,000-25,000 crore in fiscal 2025.”
Incremental investments would be made in new products, product development for committed platforms and development of advanced technology and electric vehicle components, in addition to capital expenditure for capacity improvements and upcoming regulatory changes.
ICRA said it expects capital expenditure on automotive ancillaries to be around 8-10 per cent of operating income in the medium term, and the PLI scheme will also contribute to accelerating capital expenditure towards advanced technology and electric vehicle components. ".
The 2024 EV policy for electric four-wheelers would also help generate incremental demand for component manufacturers, due to the domestic value addition required, according to the rating agency.
ICRA also expects opportunities for auxiliary manufacturing of components of other alternative fuel vehicles, as their penetration increases, and expects electric vehicles to account for around 25 per cent of domestic two-wheeler sales and 15 per cent. percent of passenger vehicle sales by 2030.
This would translate into strong market potential for electric vehicle components by 2030, he said.
