ICRA expects auto component industry to register 8-10% growth in FY2017

The Indian auto component industry is expected to gain momentum and register a growth of 8-10 per cent in the next fiscal (FY2017), according to a study by ICRA.

The demand for medium and heavy commercial vehicles (M&HCV) is likely to stay robust but slow down to 13-15 per cent given the increased base of FY2016.

''Over the medium term, ICRA expects OPBDIT margin for the auto-component industry to stabilize at 14%-14.5% level, given expected bottoming out of commodity prices in the current year,'' said Subrata Ray, senior group vice president, corporate ratings at ICRA said.

''In FY2017, the rural demand (impacting motorcycles, tractors and passenger vehicle segments) will be contingent on monsoon, though government efforts in the Union Budget of FY2017 could benefit the rural economy,'' he added.

The recent ban on diesel vehicle in the National Capital Region (NCR) and additional levy of 1-4 per cent infrastructure cess on passenger vehicles (PV) in the Union Budget will impact overall demand momentum in the PV segment which accounts for bulk of the domestic OE demand for auto components.

Over the medium to long term, growth in the auto component industry will be higher than the underlying automotive industry growth given the increasing localisation by Original Equipment Manufacturers, higher component content per vehicle and rising exports from India.

While export demand was weak during FY2016, robust demand for PV in North America and Europe is likely to offset the decline in the M&HCV segment in those markets over the next 9-12 months.

With anti-locking braking system (ABS) becoming mandatory in 125cc+ two wheelers from April 2018, the domestic ABS market will witness exponential growth.

Also, increasing awareness regarding safety aspects and likely implementation of mandatory crash test for passenger vehicles will further drive demand for ABS in PVs.

International players like Bosch, Continental and home grown majors such as Brakes India will be key beneficiaries of the mandatory implementation of ABS for two-wheelers and PVs. At present, ICRA estimates ABS penetration of 30 per cent in PV segment and minimal (less than 5 per cent) in the two-wheeler segment.

The ABS market could turn out to be a Rs 6,500 crore opportunity for suppliers by FY2019 in the backdrop of implementation of safety regulations.

Given the demand slowdown and surplus capacities, the industry has been in a consolidation mode over the last two years, taking steps towards deleveraging their balance sheet.

Gearing level as well as coverage indicators for the industry has improved considerably over the past 12-15 months and ICRA expects industry wide credit trends to remain stable, supported by demand from the OEM and replacement segment in the near term.