New Delhi: Grey market operators and micro enterprises in India’s automobile aftermarket are facing an existential threat as consumers increasingly shift towards organized brands that are better equipped to absorb rising costs and supply disruptions triggered by the West Asia war, according to several industry executives.
At the same time, last year’s GST cuts have narrowed the price gap between formal automotive spare parts and cheaper alternatives sold by unorganized players, accelerating the shift towards formal brands. Moreover, GST cuts have also sparked buyers moving to premium segments which is helping in sales of helmets and auto fluids and lubricants with a premium over local products.
At least three auto ancillary companies—Studds Accessories, Ask Automotive and Motul India—said organized big brands have gained an edge owing to several factors which include reducing price gap and rising premiumisation post GST cuts, and supply chain disruptions over the past three months.
In an earnings call on 25 May, Sidhartha Khurana, managing director of Faridabad-based helmet maker Studds Accessories, said the unorganised market might not be able to tolerate the current price pressures well.
“Some of the smaller people might shut shop because when we are having margin pressures, they’re also having a lot of pressures, cost pressures as well. So, some might be able to sustain, some might not be able to sustain,” Khurana said.
With a market capitalization of nearly ₹2,000 crore, Studds estimates it contributes more than 25% of the two-wheeler market’s helmet volumes.
Studds expects the unorganized segment's share of the helmet market to decline from about 30% currently to 10-15% over the next few years.
While authorized service centres typically stock products from established brands, millions of vehicle owners continue to rely on local garages, many of which sell accessories and consumables like engine oil or gear oil from grey-market operators and micro enterprises.
Typically, there is a 10-25% gap in prices of organized larger players and unorganised small grey market players, which is shrinking.
The GST effect
“GST rationalisation has structurally narrowed the price arbitrage that grey market operators earlier enjoyed,” said Harshvardhan Sharma, group head - automotive technology & innovation at Nomura Consulting, adding that customers, workshops and fleets are now more willing to pay a little extra “for assurance, warranty, availability and consistency”.
Auto parts maker Ask Automotive highlighted how GST cuts are helping larger brands compete better with unorganised players.
“Since all our products were under the category of 28% GST, hence the reduction of GST rate from 28% to 18% is helping us outgrow in the Indian aftermarket and capture more market share from grey market operators and duplicators,” Kuldip Singh Rathee, chairman and managing director at the Gurugram-headquartered company, told analysts and investors during the company’s 20 May earnings call.
Ask Automotive controls about 50% of the advanced braking system supplier market for domestic OEMs, with market capitalization of nearly ₹9,000 crore.
The West Asia effect
Meanwhile, the West Asia war has also impacted the sector, with prices of input commodities like steel, aluminum, and platinum group metals, among others, surging over the past few months.
Another area where smaller players are increasingly facing pressure is in the lubricant aftermarket due to dependence on refineries for oil to make the products.
“All big companies like us, who have got contracts in place with the refineries, are getting stocks, though at a higher price,” Nagendra Pai, CEO at Motul India & South Asia, the Indian unit of the French company, told Mint.
“What is impacting the industry is that the smaller companies in the market who actually purchase on spot, they are not being given stock,” Pai said, adding that it aids the trend of formalisation of the aftermarket.
Motul is a leading player in the premium lubricant market with over 50% market share as per its own estimates.
According to Vinod Kumar, president of the India SME forum, an industry association representing nearly 100,000 MSMEs in the country, geopolitical volatility and crude/base-oil uncertainty favour larger lubricant players since they have stronger procurement contracts, refinery relationships, inventory buffers and distribution reach.
“Large corporations have been hedging or stocking inventory in advance, but smaller lubricant dealers and MSMEs lack this financial capacity, leaving them vulnerable to price fluctuations and supply disruptions,” he said.
According to Kumar, MSMEs provide crucial services in the automobile aftermarket sector in domains such as automotive lubricants, hydraulic fluids, agricultural machinery lubricants, vehicle servicing and auto workshops, and all these are impacted by the West Asia war.
Smaller vendors in the automotive aftermarket sector are increasingly reworking inventory plans, considering collective procurement to aggregate demand and reduce prices, and renegotiating credit cycles amid the ongoing war, Kumar added.