70% drop likely in auto component industry margins
The rating agency said that while the production volumes were stable in April, retail sales declined sharply during the last two months indicating inventory build-up in the system
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Auto component industry is likely to witness a 70 per cent decline in operating profits in the first quarter of the current fiscal due to disruptions caused by the second wave of Covid-19, as per domestic ratings agency Icra. The challenges for component manufacturers will be further compounded by the sharp increase in commodity prices, which are generally passed through to original equipment manufacturers (OEMs) with a lag of three-six months, Icra noted. "ICRA estimates a revenue loss of 30-40 per cent quarter on quarter, and this will translate into a sequential decline in EBITDA of over 70 per cent during the first quarter for the industry," it added.
Exports have come to the industry's rescue in the last few months, when domestic demand nosedived due to lockdown restrictions, Icra said. Suppliers dependent solely on domestic demand have been the worst impacted, it added. Icra noted that despite the short-term headwinds, it expects the domestic auto component industry to register a 20-23 per cent revenue growth in the current fiscal year, supported by double-digit volume growth across most automobile sub-segments and impact of commodity inflation on realisations. "The overall industry revenue will still be almost double than the April-June quarter of last financial year," it added.
Elaborating on the current situation, the rating agency said that while the production volumes were stable in April, retail sales declined sharply during the last two months indicating inventory build-up in the system. Industry volumes are expected to remain muted in June 2021 as well, with many OEMs and suppliers currently operating in single shifts, it said. The industry is also witnessing pressure on the raw materials front, impacted by the record-high commodity prices, it added. "Commodity prices are expected to remain elevated in the first half of the current fiscal, before softening in H2 FY2022. However, the current year's average commodity prices are expected to be at a multi-year high. Another cause of concern is the shortage of electronic components and increase in semiconductor prices," Icra said.
