Red Sea Crisis to Impact Auto Component Industry Margins, Moderate Growth Ahead: ICRA

The Red Sea crisis is expected to impact the margins of the auto component industry over the next few quarters due to higher container rates and shipping delays. ICRA projects moderate industry growth, with operating margins set to improve and investments in EV components anticipated to rise.

The Red Sea crisis is poised to affect the auto component industry's margins in the coming quarters due to increased container rates and shipping delays, according to credit ratings agency ICRA. The agency forecasts a moderate growth trajectory for the sector this fiscal year.

Approximately two-thirds of auto component exports are destined for North America and Europe, while around one-third of imports come from these regions, ICRA noted. The disruption along the Red Sea route has triggered a 2-3 times surge in container rates and prolonged shipping times by roughly two weeks compared to CY2023.

ICRA highlighted that operating margins are expected to improve year-on-year by approximately 50 basis points in FY2025, driven by better operating leverage, increased content per vehicle, and value additions. However, volatility in commodity prices and foreign exchange rates remain potential risks.

The liquidity position of the industry remains comfortable, particularly among tier-I players, supported by stable cash flows and earnings. ICRA anticipates a revenue growth slowdown for the Indian auto component industry to 5-7% this fiscal, from around 14% in FY 2023-24.

ICRA's Vice President and Sector Head, Vinutaa S, noted that domestic original equipment manufacturers (OEMs) account for over 50% of sales in the Indian auto component industry, with growth expected to moderate in FY2025. The aging of vehicles and increased sales of used vehicles globally are likely to boost component exports for the replacement segment.

On investment dynamics, Vinutaa mentioned that large auto component suppliers are expected to incur capex of over Rs 20,000 crore in FY2024, with similar investments projected for FY2025. These funds will go towards new product development, advanced technology, EV components, and regulatory compliance.

ICRA expects auto ancillaries' capex to be around 8-10% of operating income over the medium term, with the PLI scheme accelerating investments. The EV policy for 2024 is also expected to drive demand for component makers through domestic value addition mandates.

ICRA forecasts that EVs will constitute around 25% of two-wheeler sales and 15% of passenger vehicle sales in the domestic market by 2030, presenting significant market potential for EV components.

(With inputs from agencies.)