Good September quarter results notwithstanding, the upbeat mood seen among India’s auto component makers for the last two years is slowly wearing off. Forecasts of slower demand for vehicles in domestic and international markets could weigh on the growth of these companies.

That is a far cry from the healthy picture visible now. The top 20 listed component makers showed a stellar 20.5% average sales growth in the first six months of FY19 against a year ago. This was better than the 18.4% growth in the first half of FY18. Likewise, Ebitda (earnings before interest, tax, depreciation and amortization) grew by an impressive 18.1% but on a low base of an 8% contraction in the year-ago period.

The strong numbers were, however, accompanied by cautious management commentary. Component makers have hinted at a slowdown in original equipment (OE) sales, especially domestic passenger vehicles. Aggregate revenue growth of listed OE firms (two-wheelers, passenger vehicles and commercial vehicles) has tapered to single digits after a scorching 20% growth for 3-4 quarters. Few analysts believe that a delayed festive season caused the slowdown in September quarter sales.

But dealers are not as optimistic, as auto sales growth was slack through the festive season. Perhaps, the higher cost of ownership due to rising interest and fuel costs could keep vehicle sales subdued in the near term. This will have a knock-on effect on component makers’ performance too.

Meanwhile, the overseas scenario is dull too. Large exporters of auto components and those with subsidiaries overseas, such as Motherson Sumi Systems Ltd, are already feeling the headwinds. Consolidated results were adversely impacted by tepid sales and margin contraction in European subsidiaries. Bharat Forge Ltd, another huge exporter of auto parts and forgings, saw its export growth rate come down by half in the first six months of FY19 over the year-ago period. Apollo Tyres Ltd is confident about revenue growth but expects raw material price (rubber and crude oil derivatives) volatility to adversely impact margins.

These concerns seem to ratify Moody’s outlook for global auto sales in a report released a couple of months ago. It had pointed out that West European light vehicle sales will grow 2% in calendar year 2018 before slowing to 0.5% in 2019. US light vehicle (passenger vehicles) sales are likely to extend the recent slide amid rising interest rates, higher vehicle prices and threat of tariffs on auto imports prompting consumers to consider buying used cars or delaying purchase. And, growth in Japan and China are likely to wane too.

The combined effect of these adverse developments will slowly but surely affect revenue and profit growth of auto component makers. Pavethra Ponniah, vice president and sector head (corporate sector ratings) at Icra Ltd said the sharp increase in commercial vehicle component exports from India to the US and Europe had supported overall components exports. A slowdown in these two regions, which comprise about 62% of overall exports, is bound to impact component exports from India that grew at a record 23% in FY18.

Lower sales growth and higher costs will drag profitability down, which in any case has been trending lower in the past couple of years. No wonder then that the euphoria in automobile and component stocks has been ebbing in the recent past.

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