ICRA Limited, one of India’s leading credit rating agencies, has forecast a moderation in growth for the Indian auto component industry in the fiscal year 2025. This comes on the heels of a robust performance in FY2024, signaling a shift in the industry’s trajectory.
According to ICRA’s analysis, which is based on a sample of 46 auto ancillaries with aggregate annual revenues exceeding Rs 3,00,000 crore in FY2024, the industry is expected to see revenue growth ease to 5-7% in FY2025. This marks a significant slowdown from the impressive 14% growth witnessed in FY2024.
Despite the anticipated slowdown, there’s a silver lining for the industry. ICRA projects a year-on-year improvement of approximately 50 basis points in operating margins for FY2025. This improvement is attributed to better operating leverage, higher content per vehicle, and increased value additions. However, the agency cautions that the industry remains exposed to potential volatility in commodity prices and foreign exchange rates.
Vinutaa S, Vice President and Sector Head of Corporate Ratings at ICRA Limited, provided insights into the factors influencing this forecast. “Demand from domestic original equipment manufacturers (OEM) constitutes over 50% of sales for the Indian auto component industry, and the pace of growth in this segment is expected to moderate in FY2025,” she explained. The replacement demand is also projected to grow at a modest 5-7%, following a relatively weak first quarter in the current fiscal year.
The export market, which accounts for nearly 30% of the industry’s revenues, is likely to face headwinds due to subdued growth in end-user markets. However, Vinutaa highlighted a potential opportunity, stating, “Ancillaries will benefit from supplies to new platforms as global OEMs diversify their vendor base and increase outsourcing.”
The auto component industry is not resting on its laurels. ICRA estimates that the sector will invest Rs. 20,000-25,000 crore in FY2025 towards capacity expansion and technological developments. This substantial capital expenditure, expected to hover around 8-10% of operating income over the medium term, is partly driven by the Production Linked Incentive (PLI) scheme, which is accelerating investments in advanced technology and electric vehicle (EV) components.
The transition to electric vehicles presents both challenges and opportunities for the auto component industry. ICRA projects that EVs will account for around 25% of domestic two-wheeler sales and 15% of passenger vehicle sales by 2030, creating a strong market potential for EV components. However, this transition could affect traditional engine and drive transmission component manufacturers.
The industry is also grappling with global supply chain disruptions. The recent crisis along the Red Sea route has led to a surge in container rates and increased shipping times, potentially impacting margins for players involved in exports and imports with North America and Europe.
Despite these challenges, the credit profile of most auto ancillary players rated by ICRA remains in the investment grade, reflecting healthy cash accruals and comfortable debt levels. The agency notes that rating upgrades have outpaced downgrades since FY2022, indicating an overall improvement in the sector’s financial health.