The after-market demand for components, which accounts for 18% of the industry turnover, has also slowed
Automobile exports from OEMs were up by a paltry 1% year-on-year in the first six months of FY20
A variety of issues— domestic and global— are challenging growth prospects of auto component makers. From the risk of a demand slowdown in automobiles that started about a year ago, the component industry’s problems are steadily compounding, with trade tensions across international markets and a broad-based slowdown in the parent auto industry across markets.
On the back of a weak first quarter, analysts have forecast a dismal Q2 FY20 performance for the sector.
Domestic sales of leading original equipment manufacturers (OEMs) such as Maruti Suzuki India Ltd, Hero MotoCorp Ltd and Ashok Leyland Ltd fell 30%, 21% and 45% respectively in Q2 from a year earlier.
Automobile exports from OEMs were up by a paltry 1% year-on-year in the first six months of FY20. Note that exports were up 21% year-on-year in the corresponding period of FY19.
A report by Edelweiss Securities Ltd said, “OEMs have resorted to production cuts due to higher inventory, which is likely to keep revenue growth of ancillaries under check." Analysts have forecast the year-on-year revenue fall in Q2 may be sharper than Q1 for component makers.
Component makers are unlikely to gain much from soft commodity prices or from corporate tax cuts, given the lack of pricing power with OEMs who are struggling to prune inventory.
Crisil Ltd estimates a 160-180 basis point dip in FY20 operating margins for the component sector, despite lower raw material prices as demand remains weak.
Since April, shares of the companies mentioned above have fallen by a steep 15-20%.
To be sure, some component segments such as batteries and tyres, which have a dependence on the replacement market, may weather the slowdown better. But with the industrial slowdown spreading to areas outside of the auto universe, even diversified firms such as Bharat Forge Ltd will be under pressure.
Rating agency Icra Ltd recently revised its outlook for the sector to negative. In addition to the slowdown woes of OEMs, it said that even after-market demand for components, which accounts for 18% of the industry turnover, has slowed. Tight liquidity at dealers has led to destocking, curtailing fresh demand for auto components.