Indian auto component industry's revenue growth to slow down in FY2025: ICRA

The Indian auto component industry is projected to see its revenue growth slow to 5-7% in FY2025, following a robust 14% growth in FY2024, according to ICRA. This forecast is based on a sample of 46 auto ancillaries with combined annual revenues exceeding Rs 3,00,000 crore in FY2024.

ICRA anticipates a year-on-year improvement of approximately 50 basis points in operating margins for FY2025. This improvement is expected to stem from better operating leverage, increased content per vehicle, and added value. However, the industry remains vulnerable to significant fluctuations in commodity prices and foreign exchange rates. Capital expenditure is projected to reach Rs 20,000-25,000 crore in FY2025, directed towards capacity expansion and technological advancements. Over the medium term, capex is expected to represent 8-10% of operating income, with the Production Linked Incentive (PLI) scheme accelerating investments in advanced technology and electric vehicle (EV) components.

Vinutaa S, Vice President and Sector Head – Corporate Ratings at ICRA Limited, elaborated, "Demand from domestic original equipment manufacturers (OEM) makes up over 50% of sales for the Indian auto component industry, and the growth rate in this segment is expected to moderate in FY2025. Replacement demand growth is estimated at 5-7%, following two to three years of healthy growth, despite a relatively weak first quarter in the current fiscal. Exports, which constitute nearly 30% of the industry’s revenues, are likely to be affected by subdued growth in end-user markets. Nonetheless, ancillaries will benefit from supplies to new platforms as global OEMs diversify their vendor base and increase outsourcing."

The anticipated slowdown in revenue growth in FY2025 is attributed to a deceleration in the domestic OEM segment's growth. On the export front, new vehicle registrations in Europe and the US are expected to remain sluggish in the coming quarters, impacted by a weak global macroeconomic environment and geopolitical tensions. Despite this, factors such as increased supplies to new platforms due to global OEMs' vendor diversification initiatives and higher value addition, partly from increased outsourcing, bode well for Indian auto component exporters. Additionally, opportunities may arise for Indian players in metal casting and forgings with the closure of plants in the European Union due to viability issues. The aging of vehicles and increased sales of used vehicles in global markets are also expected to support the export of components for the replacement segment overseas. Over the medium to long term, ICRA expects electric vehicle (EV) related opportunities, vehicle premiumisation, a focus on localisation, and changes in regulatory norms to sustain stable growth for auto component suppliers.

Further complications have arisen from disruptions along the Red Sea route, resulting in a surge in container rates by 2-3 times in YTD CY2024 compared to CY2023, and an increase in shipping times by approximately two weeks. Given that nearly two-thirds of auto component exports are destined for North America and Europe, and one-third of imports originate from these regions, a sharp and sustained increase in freight rates could impact margins over the next few quarters.

The liquidity position of the industry remains strong, particularly among tier-I players, supported by stable cash flows and earnings. ICRA expects the sector's coverage metrics to remain comfortable, aided by healthy accruals and relatively low incremental debt funding despite rising borrowing costs. Most ICRA-rated auto ancillary players are in the investment grade category, reflecting a strong credit profile stemming from stable cash accruals and manageable debt levels. Since FY2022, rating upgrades have outnumbered downgrades, indicating an improvement in the credit profile over the last several quarters.

Currently, only 30-40% of the EV supply chain is localised. While local manufacturing exists for chassis components requiring minimal technological upgrades, significant localisation has occurred in traction motors, control units, and battery management systems. However, battery cells, constituting 35-40% of vehicle costs, are still entirely imported. The relatively low level of localisation presents manufacturing opportunities for domestic auto component suppliers. The EV policy 2024 for electric four-wheelers is expected to generate additional demand for component makers due to mandated domestic value addition. For parts already used in internal combustion engine (ICE) vehicles, there may be technological advancements in certain cases, leading to higher content per vehicle. Ancillaries could also find opportunities in manufacturing components for other alternative fuel vehicles as their penetration increases.

ICRA projects EVs to account for approximately 25% of domestic two-wheeler sales and 15% of passenger vehicle sales by 2030, translating into significant market potential for EV components by 2030. The EV transition process is likely to impact the engine and drive transmission components and could also affect aftermarket demand due to fewer moving parts. However, supplies to alternative applications, new products, and export opportunities are expected to mitigate the impact to some extent. The EV migration is expected to be gradual, with ICE components continuing to have substantial demand over the medium term.

Regarding investments by auto component suppliers, Vinutaa added, “ICRA’s interaction with large auto component suppliers indicates that the industry incurred a capex of over ₹20,000 crore in FY2024 and is estimated to spend another ₹20,000-25,000 crore in FY2025. Incremental investments will be directed towards new products, product development for committed platforms, development of advanced technology and EV components, and capex for capacity enhancements and upcoming regulatory changes. R&D spending remains at an average of 1-3% of operating income, significantly lower than global counterparts. ICRA expects auto ancillaries’ capex to hover around 8-10% of operating income over the medium term, with the PLI scheme also contributing to accelerating capex towards advanced technology and EV components.”