Auto part makers shift to top gear as industry's growth accelerates

ICRA expects the industry's revenue to grow 16-18 per cent in 2021-22 supported by factors such as increasing localisation and, of course, the low base effect
The revival in auto sales has been transmitted to the component industry. Manufacturers are reporting an 18-20 per cent growth in revenues and a 50 per cent jump in profit for the third quarter of FY21.

After the initial two months of FY21 when the national lockdown stalled sales, all segments of the automobile market have grown on a sequential basis and are inching closer to previous year’s levels, except for three-wheelers and buses. Shifting post-pandemic market dynamics towards personal mobility are likely to sustain this momentum.

Vinnie Mehta, director general, Automotive Component Manufacturers Association of India (ACMA), describes FY22 as the “year of rebound” that will lead to growth and production returning to 2018-19 levels, the best year for the auto industry in its history.

ICRA expects the industry's revenue to grow 16-18 per cent in 2021-22 supported by factors such as increasing localisation and, of course, the low base effect.

Against this backdrop, component makers are expected to return to the investment cycle, which slowed after automobile sales dropped around 20 per cent, causing a 12 per cent skid in auto component sales in 2019-20. The slide continued during the first half of 2020-21, when the sector reported a revenue drop of over 40 per cent to $15.9 billion from $26.6 billion, a year ago (see table).

Yet by the third quarter Motherson Sumi Systems, one of the country’s largest component makers of wires, rubber components, cockpit assembly, air bag covers, mirrors and dashboards, reported a 15 per cent jump year-on-year. The company's consolidated profit more than doubled to Rs 798 crore from Rs 271 crore in the same quarter of the previous fiscal year.

“Though we have not yet hit the highs of the pre-Covid era, in the next quarter or two we will definitely be exceeding that as well. There is a definite shift in the mindset of the people. They want personal mobility and they are not so comfortable using the other modes of transport. So I think for another year or two, this will keep on increasing,” said Vivek Chaand Sehgal, Chairman, Motherson Sumi, in an interview.

Sundram Fasteners, part of the $8.5-billion TVS Group, which makes fasteners, powertrain components, radiator caps, water pumps and oil pumps, has also reported record results for the third quarter, with net profit up 20 per cent to Rs 124.24 crore against Rs 103.06 crore, during the same period last year.

In fact, the numbers for the latter quarter included a one-time reversal of deferred tax provision of Rs 41.98 crore; if it is excluded, PAT growth during the third quarter of 2020-21 is 103 per cent. The previous highest was Rs 111 crore during the third quarter of 2018-19.

Capacity utilisation has reached around 75 per cent. Sundram Fasteners Managing Director Arathi Krishna, is optimistic that it will increase as the demand is expected to grow further.

Going forward, Mehta of ACMA said, car sales are expected to grow 20-25 per cent, commercial vehicles by 30-50 per cent and two-wheeler by 15-20 per cent next year, ensuring double-digit growth for the auto-component industry.

Growth will come from across segments, including OEMs (which account for over 56 per cent of the auto component demand), the aftermarket (18 per cent) and exports 26-27 per cent).

But there are challenges on the road ahead. Labour could be one. Unlike other sectors, auto-component makers did not downsize, and also restored salary cuts by the third quarter. The problem now is availability of workers since the major hubs of Chennai, Gujarat, the National Capital Region, Pune and Pantnagar are dependent on migrant labour. The auto component industry employs 5.5-6 million people; by 2022, the number could expand to 7.26 million.

Also, sharp rises in raw material prices, especially of steel, aluminium, copper and rubber, of 15-20 per cent could pare margins. Steel prices alone could pinch the most since the metal accounts for about 60 per cent of input costs. Between July and December, the price of hot rolled coils grew 54 per cent on the back of a strong recovery in domestic demand. The trend is likely to persist in the fourth quarter of FY21, says ICRA.

In fact, the price rise is so steep that some small and micro units have turned down orders since their margins would be eroded. M Balachandran, chief executive officer, Delta Control Systems, is one of them. He said the raw material price rise has pared margins from 5-8 per cent to minus 3 per cent.

To balance rising raw material cost, companies have been focusing of cost rationalisation — from beefing up the supply chain to eliminating waste to reducing operational costs — travel and real estate, for example.

Diversifying into non-auto businesses such as defence, aerospace, renewable energy and the railways has also helped.  For example, the non-auto business used to account for 16-17 per cent for Sundram Fasteners; that has grown to 25 per cent. The company has lined up Rs 300-350 crore of capex, of which 10 per cent will go towards aerospace and defence.

Exports could also be subdued. In December 2020, ACMA said that for the first time ever, the industry witnessed a trade surplus with auto component exports at Rs 39,003 crore ($5.2 billion) and imports at Rs 37,710 crore ($5 billion). But with some European countries imposing fresh lockdowns, this performance may not be repeated (Europe accounts for a third of the industry’s exports).

But the industry is banking most on growing localisation to deliver growth. Localisation levels are already reasonably high. In two-wheelers, it is 95-97 per cent in passenger vehicles of less than Rs 10 lakh. But there are still items that the sector imports. For example, processors for automotive electronics are almost entirely imported owing to the lack of wafer fabrication centres in India which require high capital investment.

Since India doesn't have a sizeable presence in this area, ACMA is pinning its hopes on the  production-linked incentive scheme and is working with the automobile manufacturers’ association on a road map for increasing localisation in the entire automotive supply chain.

Meanwhile, individual component makers are also making the adjustment, forming joint ventures and investing in start-ups focusing on such technologies, though mostly for electric vehicles. Last year, for instance, Tata AutoComp Systems, signed up with Beijing-based Prestolite Electric to enter the electric vehicle components market. Hyundai, TVS Motor and Hero have explored a similar route.

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