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Auto component sector set for rebound
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SME Times News Bureau | 26 Mar, 2021
The automotive components sector will see revenue rebound 21-23 per cent
next fiscal as domestic and export demand revives after two straight
contractions and higher margins lift its operating profits, ratings
agency Crisil said on Friday.
Also, demand revival along with
prudent capital spending and working capital management, will lead to an
improvement in the credit profiles of automotive component makers next
fiscal, an analysis of 230 of them rated by CRISIL, which account for 40
per cent of sector revenue, showed.
The Rs 3.2 lakh crore
sector derives 60 per cent of its revenue from automobile original
equipment manufacturers (OEMs), with the balance split equally between
replacement demand and exports.
Hetal Gandhi, Director, CRISIL
Research, said: "The ongoing rebound in economic activity will drive a
strong recovery for OEMs next fiscal. Improving fleet utilisation and
better availability of finance will also improve demand for commercial
vehicles, while demand for personal vehicles (passenger cars and
two-wheelers) will be driven by improving urban consumer sentiment,
resilient rural incomes, modest vehicle price increases and attractive
financing options."
The uptick in OEM demand will rub off on the
automotive components sector, which could see a revenue growth of 21-23
per cent next fiscal, compared with de-growth of 13 per cent and 8 per
cent in fiscals 2020 and 2021, respectively.
Replacement demand,
which was impacted due to lockdowns and restricted movement of people
and freight, will recover gradually. Besides, exports (20 per cent of
revenue) will be aided by steady demand from the US and staggered
recovery in the European Union - two geographies that account for 55 per
cent of India's automotive component exports. Signs of the recovery
have been visible here since the third quarter of this fiscal.
However,
Crisil said that despite higher demand, capacity utilisation of
component suppliers will remain below 2019 levels. As a result,
operating margin will increase only 100-150 basis points (bps) to 10 per
cent next fiscal, after falling 150 bps in fiscal 2020 and 200-250 bps
in fiscal 2021. Consequently, operating profit will be lower than in
fiscal 2019.
The credit ratio (ratio of upgrades to downgrades)
for the CRISIL Ratings portfolio, which touched an eight-year low of 0.1
(April-December 2020) thus far this fiscal, is likely to witness steady
improvement next fiscal, in line with better performance of the
sector's players.
Rajeswari Karthigeyan, Associate Director,
CRISIL Ratings, said: "Better operating performance, controlled capital
spend - given that sufficient capacity is available - and prudent
working capital management will support recovery in credit profiles of
automotive-component suppliers next fiscal. Gearing of the sample set is
expected to be comfortable at 0.7-0.8 time as on March 31, 2021, and
improve further next fiscal. The interest cover ratio, too, is expected
to recover to 4 times from 3 times."
As the impact of the
pandemic wanes, the government's move to increase spending on
infrastructure augurs well for the automobile sector and, in turn, for
the automotive components makers.
Sustained improvement in consumer spending on automobiles will bear watching.
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Customs Exchange Rates |
Currency |
Import |
Export |
US Dollar
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66.20
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64.50 |
UK Pound
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87.50
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84.65 |
Euro
|
78.25
|
75.65 |
Japanese
Yen |
58.85 |
56.85 |
As on 13 Aug, 2022 |
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