The Signal: Automotive Components Shifting Gears

Market Beats

After a sharp rally in domestic stocks from June lows, equity benchmarks capitulated in the week ended 26th August 2022. Domestic benchmark indices ended negatively, with Nifty50 and Sensex down by 1.1 per cent and 1.4 per cent, respectively, during the week.

Globally elevated inflation in US & Europe, troubles in China’s real estate sector and mixed signals from the US Fed on rate action have impacted investor sentiments. At the domestic level, profit booking by investors and the drop in paddy cultivation areas in India have also affected market sentiments.

Index of consumer sentiments & index of current economic conditions for the week ended on a negative note. The rural segment majorly contributed to the decline.

Hot Stuff – Automotive components companies’ turnover hits 5-year high

Despite declining consumer sentiments, some specific segments within the Indian economy hold promise. The automotive component is one of them. Per a report released by the Automotive Component Manufacturers Association of India on 22nd August 2022, India’s Auto Component industry has clocked the highest ever turnaround of $56.5 bn in FY22. It is 23 per cent up from the numbers reported in FY19.

Key Observations

Sales to OEMs grow 22% on the back of a recovery in the market
Exports grow by 43% and imports by 33%, clocking trade surplus for the first time
Auto component Aftermarket grows 15% to Rs.74,203 crore (USD 10 billion)
Industry optimistic as the economy revives and vehicle demand exhibits stability

Despite the supply side issues, exports and vehicle sales have risen gradually, and the auto component industry demonstrated remarkable performance in FY22. After facing supply-side challenges in the last two years, vehicle sales in PV, CV and tractor segments seem to be reaching pre-pandemic levels.

As per industry experts, the 5Cs – Covid-19, chip shortages, container costs, commodity prices and the conflict have been the key factors responsible for disruption in the automobile and auto component industry.

Key reasons for a sharp recovery in Auto Components Industry:

Correction in aluminium & steel prices:

Raw material prices have declined after nearly 20 months of the persistent rally. This may allow auto components and automobile manufacturers to post better margins in the upcoming quarters.

The raw materials cost accounts for nearly 65-70% of the total revenue. The price of the above metals, which form a significant chunk of raw material costs, have softened over the recent months. The softening of commodity prices is a critical driver for margin expansion, creating an overall positive outlook for the sector.

2. Announcement of PLI schemes by the government:

The Production Linked Incentive (PLI) Scheme for Automobile and Auto component industry proposes financial incentives to boost domestic manufacturing of Advanced Automotive Technology (AAT) products and attract investments in the automotive manufacturing value chain. Its prime objectives include overcoming cost disabilities, creating economies of scale and building a robust supply chain in areas of AAT products.

The Production Linked Incentive (PLI) Scheme for Automobile and Auto Components successfully attracted a proposed investment of 74,850 crores against the target estimate of investment of 42,500 crores over a period of five years. It has helped facilitate the value chain framework.

Way forward

With the launch of the Make in India initiative, the government is expected to vitalise substantial investments in the auto components sector. Due to the possible shift in supply chains, India can increase its global auto component trade share. Due to high development prospects in all vehicle industry segments, the auto component sector is expected to rise by double digits in the coming future.