Mumbai: Credit rating agency Icra has revised its outlook for the auto components industry to negative following more than three quarters of continuous decline in the wholesale dispatches across all vehicle categories.
The ratings agency says that the demand for spare parts in the aftermarket, which accounts about 16%-18% of the total components industry’s turnover, has also slowed down with decline in the movement of goods and weakness in freight activities. “Tight liquidity across the aftermarket dealer channel has led to de-stocking, curtailing fresh demand for the component manufacturers," Icra said in a statement.
The ratings agency also points out the grim situation for the component makers on the export front on global demand slump for automobiles, ‘partly due to heightened trade tensions and other geopolitical factors.’
“The export demand for Indian component manufacturers could be impacted in the coming quarters," the report warned.
“Despite accommodative commodity prices, weakness in OEM demand will impact credit metrics for component manufacturers. This comes amidst rapid and mandatory technological advancements in vehicle safety and emissions, which has led to sizable capital expenditure by component manufacturers over the past few years," said Subrata Ray, senior group vice president & head, corporate sector ratings, Icra.
Although the credit profile of individual component manufacturers would be decisive in steering through the ongoing slowdown, which is expected to continue into the next financial year, Icra says that tier one suppliers that have used strong cash flows from previous years of growth to develop strong balance sheet and product development capabilities will be more resilient during the downturn.
“On the other hand, the entities with leveraged balance sheets are likely to face stress. Smaller players, especially tier two and three suppliers will feel the pressure more acutely as they lack pricing power and bear the brunt of stretched work capital cycle," the report said.
Ray of Icra said that most players in the auto component sector are taking a relook at their capital expenditure plans. “Consequently across segments, ICRA estimates a cut back ranging between 15%-25% by most players in the auto components industry," he added.
Earlier in July reviewing the performance for the last fiscal, the Automotive Component Manufacturers Association of India (Acma) had said that the auto components industry stood at ₹3.95 lakh crore growing 14.5% over the previous fiscal. The said growth, it said, stemmed largely from the first half of FY19. Meanwhile, the auto component exports grew 17% in FY19 to ₹106,048 crore.
“A current 15-20% cut in vehicle production has led to a crisis like situation in the auto components sector. It trend continues, an estimated ten lakh people could be laid-off," Ram Venkataramani, past-president, Acma had warned in July.