Auto Components Industry Maintains Capex Plans Amidst Growth Moderation
The Indian Auto component industry is projected to have high single digits growth in the financial year 2025 by the Rating Agency ICRA. To estimate this growth rate of the Indian Auto component industry, ICRA used a sample of 46 auto ancillaries with total annual revenue of over Rs 3,00,000 crore in the financial year 2024. It is supported by the 14 percent growth recorded in the industry in the financial year 2024. It is important to point out that more than half of the Indian auto component industry sales is done by the domestic original equipment manufacturers (OEM) in India. In the current quarters, the automotive sales are observed to be slowing down. This could adversely impact the demand for auto components from the domestic OEMs.
Not only does the demand for automotive components for the manufacturing of vehicles slow down but also the demand for components in the after-sales markets. After having a strong growth for like two to three years, it is forecasted to slow down by five percent to seven percent in the financial year 2025.
The Indian automotive component industry close to one-third of the revenues comes from the export of automotive components. The export segment is also expected to face slowdown in growth due to fall in growth in consumer markets. Despite this, supplies to new platforms will rise due to vendor diversification steps taken by the global OEM companies and rise in outsourcing. The new platform refers to companies which incorporate the latest technologies and promote innovations. The OEM supplying the latest technologies models will be able to align better with the changing dynamics in the automobile industry and will also be able to generate growth. While vendor diversification will help companies to not remain dependent on a single entity and can diverse risk and make a more resilient supply chain. Both outsourcing and vendor diversification is a good opportunity for Indian auto component companies to increase their growth and become competitive with the global world.
In the European Union region, automotive companies announced shutdown of plants and big layoffs. This could be an opportunity for Indian auto components manufacturers in metal casting and forgings. The Indian companies will have opportunities in the international replacement or after-sales market segment due to ageing of vehicles and sale of used vehicles in the global markets.
The ICRA reports that the Indian auto components players will have opportunities in electric vehicles (EV), vehicle premiumisation and localisation of auto components. The growth for the auto components players will be supported by the changes in the regulatory norms. Currently, supply chanin of Electric Vehicles is 30 percent to 40 percent localised. Chassis components are produced locally which need minimum technological progress. Also considerable localisation is observed in control units, battery management systems and traction motors over the period. The battery cells are still imported and it accounts for 35 percent to 40 percent of the vehicle cost. Although it seems like localisation is a key advantage for growth of domestic OEMs, low level of localization can also act as an advantage for them. For instance, technological advancement can occur for the parts used in internal combusion engine (ICE) vehicles as well as production of components for vehicles which use alternate fuels.
While considering the growth of the auto component industry, it is important to take its profitability into consideration. As per the reports of ICRA, the sector’s operating margins are anticipated to remain in the range of 11 percent to 11.5 percent in the financial year 2025. One of the reasons for this is double and for some routes triple container rates due to disruption in the Red Sea route in the year 2024 as compared to the previous year. India’s auto components are exported around two-third to North America and Europe and around one-third of auto components are imported from these regions only. The considerable increase in freight rates would adversely impact profit margins for upcoming few quarters. The margins in the medium term will get advantage from good operating leverage, increased in value or components in the vehicle. However, it will also remain vulnerable to any kind of sharp volatility in foreign exchange rates and prices of commodities.
Despite moderate growth, ICRA forecasts the auto component industry to continue with its capital expenditure plans (Capex). The plan for the financial year 2025 will be around 15,000-20,000 crore and for the financial year 2026, it will be around 20,000-25,000 crore. It is expected that mostly internal accruals will be used for operating income of around 7 to 8 percent in the medium term. While funding for larger projects like battery cells localisation is through debt initially. Aside from capex used for capacity building and coming regulatory changes, the incremental investment will be used for development of advanced technology, products and EV components. Also according to ICRA, the industry’s liquidity position will remain in a good position especially for Tier-1 Suppliers due to stable cash flows and earnings. Also the coverage metrics will remain good due to stable internal accruals and low incremental debt financing despite rise in the cost of borrowings.
The image added is for representation purposes only
