Mumbai: The auto component industry is likely to witness a 16% drop in revenues in FY21 due to the impact of the covid-19 pandemic on supply chain and demand for vehicles globally, credit rating agency Crisil Ltd said.
“This will add to the pain from an estimated de-growth of 10% in the industry’s revenue to ₹3.2 lakh crore last fiscal," Crisil said in a note on Tuesday, adding that the forecast is based on its analysis of about 300 rated auto component suppliers that account for 40% of the industry’s revenue.
Crisil’s forecast comes on the back of the grim demand for new vehicles in the domestic market, which accounts for over two-thirds of the auto component sector’s revenue. Production schedules of the vehicle manufacturers are expected to remain modest during the first two quarters of the ongoing fiscal, although the demand from rural belts may benefit two-wheelers and small commercial vehicles besides tractors.
The credit rating agency pointed out that the demand from aftermarket and exports, which together account for the remaining one-third of the auto component sector’s annual turnover, would also remain muted this fiscal.
“Possibly for the first time in over a decade, we are seeing demand from OEMs, exports and the aftermarket in the red this fiscal, in addition to demand slowdown for two consecutive years," said Anuj Sethi, senior director, Crisil Ratings.
Sethi said despite cost rationalization measures by auto component suppliers and up to 80% of total costs being variable in nature, the operating profitability will take a hit of up to 250 basis points for the rated portfolio.
“The impact on absolute operating profit will be almost 30-35%. This will add to the decline seen last fiscal, and impact cash flows," he warned.
Crisil said the credit ratio of its auto components portfolio has already declined to 0.8 times in FY20, lowest in six years, owing to unprecedented economic slowdown even before the pandemic struck the domestic market.
According to Sameer Charania, director at Crisil Ratings, the only silver lining is the sector’s prudent financial practices and well-managed balance sheets.
“Firms with component concentration to commercial vehicles and those which have undertaken large debt -funded expansion in recent times will be more vulnerable than more-diversified ones," the note said.