Comfortable ride for component firms as domestic auto sales rise unabated
If auto sales are on overdrive, can auto component makers be far behind? Component makers are comfortably riding piggyback on the growing fortunes of domestic original equipment manufacturers (OEMs). The December quarter’s stellar revenue growth and margin expansion for component firms mirror the gains from many positive factors that came together. The low base of the year-ago period when growth hit a roadblock due to demonetization set the stage for higher growth this time round. Then, strong growth across all auto segments increased demand for components. High demand made it possible for manufacturers to pass on cost increases to the original equipment suppliers which also supported revenue growth.
Hence, firms such as Bosch Ltd, Gabriel India Ltd, Wheels India Ltd, Sundaram Clayton Ltd, Exide Industries Ltd and Amara Raja Batteries Ltd have shown steady growth in the last few quarters.
According to a report by Icra, 43 companies that account for 26% of the component sector’s revenues grew by 18.5% year-on-year (y-o-y) in the December quarter. The key contributors were suppliers to passenger vehicles and two-wheelers that are clocking stellar sales every month. Meanwhile, good commercial vehicle sales, thanks to the government’s policy measures on pollution and overloading and robust infrastructure activity, also contributed to the party. And a good monsoon drove tractor sales up too.
That apart, auto component makers are among the biggest beneficiaries of the new goods and services tax (GST) that is surely although slowly eliminating the unorganized sector. Further, sustained auto sales have also trickled down to demand for components from the replacement market. Data collated by the Auto Component Manufacturers Association (AMCA) shows that the annual sales growth in the replacement market that was 12% over three years till FY2016, shot up to 27% in FY2017. Growth should be higher in the current fiscal.
All these factors will drive revenue growth in the quarters ahead until the auto growth cycle continues. Operating margins too will inch up, though the current margin of 14.1% is way below the eight quarter peak of 16.2% (for Icra’s sample). However, within these component firms, the smaller ones may find it economically unviable as compliance with new tax and technological regulations is expensive. The fittest would therefore survive and there could be consolidation in the sector.
Meanwhile, exports did well on the back of commercial vehicle sales in North America and robust passenger vehicle sales in Europe. These two regions account for two-thirds of the component exports from India. This explains the rise in shares of Bharat Forge Ltd and Motherson Sumi Systems Ltd for about a year, as they have a huge exposure to these regions.
But there is a sluggishness in the European auto sales on account of Brexit and also the new stringent norms in favour of electric vehicles to prevent pollution.
On the whole, however, the component industry can make hay while the sun shines. Most brokerages have therefore revised estimates of revenue and profit margins for component firms for FY2018, as domestic auto sales have surpassed expectations every month.
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