Auto sector slowdown, tech changes a double whammy for auto component firms2 min read . Updated: 19 Apr 2019, 03:18 AM IST
- Auto component makers need to brace up for sharp production cuts in the near term, with their large customers cutting production
- Cost pressures due to new safety and emission norms may impact profit margins of both auto and auto component firms
Mumbai: It is no secret that the pain of slowdown in the auto sector will trickle down to auto component makers, albeit with a lag. Component makers need to brace up for sharp production cuts in the near term, with their large customers cutting production. They could also face cost pressures because of technological changes in the industry.
The year-on-year revenue growth rate for most firms has slackened since the June quarter, according to Mint’s analysis of the top 25 auto component firms, sorted on the basis of revenue. Ebitda (earnings before interest, tax, depreciation and amortization) stuttered, too, as operating leverage took a beating with lower sales.
The situation has since worsened. Overall vehicle production in the country was 18.5% lower year-on-year in March, compared with the 18.6% increase in the year-ago period. This reaffirms that the auto sector slowdown is here to stay for some more time. Interest rate cuts and festive seasons have also failed to lift auto sales in the second half of FY19.
“Revenue and profit growth of component firms in FY20 will be a mixed bag depending on their product portfolio, despite the overall slowdown," says Pavethra Ponniah, vice-president and sector head (corporate ratings) at Icra Ltd.
For instance, Kansai Nerolac Paints Ltd depends a lot on automotive paints, with Maruti Suzuki India Ltd being its biggest customer. A lower production forecast in the passenger vehicle segment makes a case for lower revenue growth for this company. Two-wheeler maker Honda Motorcycle and Scooter India Pvt. Ltd also hinted at a 15-20% drop in June quarter production because of weak demand and a squeeze on auto financing. Suppliers in the two-wheeler segment will be severely affected as well.
There is also uncertainty because of the forthcoming changes in safety and emission norms. Commodity prices are softening, but cost pressures due to the new technology may impact profit margins of both automobile and component firms. In times of flagging demand, it’s not clear if these higher cost pressures can be passed on easily.
That is not all. Global automobile demand is subdued. According to an Icra report, European passenger car registrations are likely to be lower in 2019. A slowdown is also expected in the US Class 8 truck sales after they scaled peak growth rates this year.
All these factors are dampers for exports of auto component makers as well. Shares of most auto component firms have been falling since January.
Within the sector, companies with some exposure to the commercial vehicle sector and to the replacement market, such as batteries and tyres, may be better off compared to the rest of the pack.