Margins of auto ancillaries expected to return to pre-Covid levels in FY 2023 - ICRA

ICRA expects its sample of 49 auto ancillaries with aggregate annual revenues of close to Rs 3,00,000 crore to grow by 8-10% in FY2023, supported by stable demand and gradual easing of supply-chain issues in FY2023. Stable demand environment from the OEM segment coupled with steadily increasing premiumisation of vehicles, focus on localization, improved exports potential and EV opportunities (resulting in higher content per vehicle) will translate into healthy growth prospects for auto component suppliers. While cost pressures are likely to continue in H1 FY2023, ICRA expects YoY improvement of 50-75 bps in operating margins in FY2023, with easing of commodity prices and supply-chain issues. The operating margins for the ex-tyre sample are likely to return to pre-Covid levels of 10.5-11% in FY2023 compared to 10% in FY2022. While the sharp rupee depreciation vis-a-vis USD could impact the cost structure of auto ancillaries with high import dependency, the impact on margins will be driven by the ability to pass through the same.

Giving more detail, Ms. Vinutaa S, Vice President and Sector Head, ICRA, says, "Domestic OEM demand is likely to remain stable in FY2023. Further, demand for public and private transport is expected to remain healthy with increase in mobility, supported partly by reopening of schools and offices. This, along with improvement in economic activity and freight movement will aid replacement volumes in the near term. The replacement segment is also expected to benefit from likely postponement of new vehicle purchases due to increase in vehicle prices with cost inflation and elongated waiting periods, especially in the PV segment, because of supply-chain issues witnessed by OEMs on account of semi-conductor shortage. However, export orders have slowed down in the last few months, impacted by the global economic gloom, geopolitical tensions and elongation of supply-chain issues. While they remain healthy currently despite the slowdown, this would remain a monitorable."

Auto ancillaries have not been able to pass through the sharp increase in commodity prices in the last 3-4 quarters entirely, resulting in a decline in gross margins. However, gross margins from Q2 FY2023 are likely to benefit from the recent correction in metal prices. Ancillaries are looking at enhancement of product portfolio and increased value addition/content per vehicle. The new products targeted are largely EV agnostic or for EVs. Further, companies have adopted consolidation of delivery and optimization of routes to the extent possible to reduce freight expenses. Increased usage of power from renewable sources, factoring arrangements to reduce working capital requirements and other measures like improvement in output per employee through automation and technology enhancement are likely to support margins going forward.

Liquidity position remains comfortable for auto ancillaries, especially across tier-I and tier-II players, and ICRA expects coverage metrics for the sector to remain comfortable going forward as well, aided by healthy accruals and relatively low incremental debt funding. While total debt/OPBDITA for our sample is expected to improve to 1.9x in FY2023 from 2.2x in FY2022, interest coverage is also expected to improve to 8x in FY2023. Over 80% of the auto ancillaries rated by ICRA are in investment grade, reflecting a healthy credit profile, stemming from healthy cash accruals and steady decline in debt levels.

On the capex outlook, Ms. Vinutaa says, "ICRA's interaction with large auto component suppliers indicates a cautiously optimistic approach towards capital expenditure plans for FY2023. ICRA Research expects auto component suppliers to gradually increase their capital expenditure outlay in FY2023 to 6-6.5% of operating income, translating into Rs. 16,000-Rs. 18,000 crore for ICRA's ex-tyre sample of auto component manufacturers. The incremental investments will be primarily towards capability development i.e. new product additions, product development for committed platforms, and development of advanced technological and EV components, unlike the investments towards capacity expansion witnessed in the past. The recently-announced PLI scheme will also contribute to accelerating capex over the medium-term besides investments by new entrants in the EV segment. The capex is expected to hover around 7-8% of operating income in FY2024 and FY2025, which is over Rs. 20,000 crore each for FY2024 and FY2025."

Source : Equity Bulls

Keywords

ICRA AutoAncillary FY2023