India Ratings and Research (Ind-Ra) has maintained an improving outlook for the auto ancillary sector for 2HFY22. It has also maintained a stable outlook on its rated portfolio for 2HFY22.

The agency expects the sector revenues to grow 18%-20% yoy in FY22, supported by strong growth in demand from original equipment manufacturers (OEMs) and export market. Revenue would also be aided by higher realisations due to a likely rebound in medium & heavy commercial vehicles sales as well as passthrough of higher raw material prices. Although Ind-Ra has lowered its FY22 OEMs sales volumes growth forecast to 12%-16% yoy against the initial estimate of 16%-20% yoy, higher exports and improved realisations keep the revenue growth estimate intact. The agency expects the export demand to be marginally better than that from OEMs, while demand from the aftermarket is likely to provide a steady contribution. 

However, profitability margins are likely to see a 50-100bp yoy contraction in FY22 due to increased input prices and supply chain disruptions, including the semiconductor chip shortage, despite better operating leverage. Still, the EBITDA is expected to increase on an absolute basis. Credit metrics are thus likely to improve in FY22. The agency expects capex spending to resume in FY22, led by capex deferrals from FY21, debottlenecking activities and expansions with committed offtake. Ind-Ra expects capex intensity to increase in FY23 once capacity utilisations reach optimum levels on a year-round basis. The agency expects the sector’s focus on cash flow allocation towards profitable assets to continue along with reducing exposure in loss-making ventures. 

The pandemic-led supply chain disruptions have solidified the thrust on localisation for the sector. While the fine print is awaited, the Performance-linked Incentive Scheme could create competitive advantages and growth opportunities for the segment in the medium to long term. Also, the introduction of the National Vehicle Scrappage Policy could lead to an uptick in demand, especially in the commercial vehicle segment; although the benefit from the policy would mainly accrue FY24 onwards.

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Analyst Names

  • Pallavi Bhati

    Senior Analyst
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    0124 6687256

    Shruti Saboo

    Associate Director
    0124 6687265

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121