While the domestic slowdown was the key drag on their financials, ancillaries especially the larger ones also bore the brunt of the slowdown in the overseas markets.
Consider Motherson Sumi Systems and Bharat Forge, the second- and third-largest auto component companies by market capitalisation. They get 55-70 per cent of their revenues from exports and operations outside the country.
The two reported a 17-18 per cent dip in operating profit for the June quarter because of weak global auto demand and ramping-up issues. Given the disappointing June quarter performance, analysts have cut their earnings estimates for the two by up to 16 per cent over the next couple of financial years.
The muted outlook is particularly telling on Bharat Forge, which gets 40 per cent of the company’s revenues from commercial vehicles, which are highly cyclical and heading into a down cycle both in India and the US.
Kapil Singh and Siddhartha Bera of Nomura expect domestic medium and heavy commercial vehicles to fall by 20 per cent in the current financial year in the domestic market (from flattish performance earlier) and by a similar proportion in the US market (Class-8 truck orders in FY21).
India’s largest auto-component maker Bosch believes that the slowdown is structural rather than cyclical and may extend up two years before growth comes back. The reported a 23 per cent fall in operating profit on the back of a 13.5 per cent drop in automotive revenues as well as higher costs.
What is impacting the sector is the fact the slowdown has come at a time when companies are grappling with policy changes, transition to BS-VI emission norms, and lack of clear road map for introduction of electric vehicles.
The problems have compounded for those companies who cater exclusively to the needs of their customers as compared to component segments such as the tyre and battery makers which get over two thirds of revenues from the replacement market.
Hetal Gandhi, director, CRISIL Research, said, “Battery and tyre manufacturers are better placed as compared to segments such as engine part, body & chassis, due to higher share of replacement demand. Even during slowdowns the replacement segment tends to buck the trend. While these segments will show signs of weakness, they will be buoyed by aftermarket demand.”
In the June quarter, even as volumes for the auto makers is down over 20-30 per cent across segments, battery makers have reported a replacement volume uptick.
With little clarity on the demand outlook, investors should wait out the next couple of quarters rather than rush in to catch a falling knife.