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The operating margins of India's auto component sector are expected to decline slightly this fiscal due to rising input and freight costs linked to the West Asia conflict, according to a report by Crisil. The report said the sector's operating margins are likely to moderate by 100-150 basis points this fiscal from around 12 per cent last year, but that revenue growth might remain resilient, keeping absolute operating profits stable.

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Geopolitical Tensions Impacting Supply Chains

It noted that ongoing geopolitical tensions are reshaping global supply chains and increasing working capital requirements for manufacturers. "The global supply-chain uncertainty is prompting manufacturers to maintain higher buffer stocks to safeguard production schedules. This is likely to increase inventory levels by 15-20 days from the current 80-85 days," the report said.

According to Crisil, larger companies are better positioned to manage the higher inventory burden due to their stronger bargaining power and scale. OEMs accounted for more than two-thirds of the sector's revenue in the last fiscal. The report noted that "auto component makers accounting for almost half the sector's revenue of ~Rs 9 lakh," while "exports and the aftermarket contributed 16 per cent and 12 per cent, respectively."

Cost Pressures and Demand Outlook

The report highlighted that raw materials make up nearly three-fourths of the sector's total costs. It added that "prices of steel and aluminum, which together account for 50-60 per cent of input costs, have risen sharply."

Despite cost pressures, Crisil expects demand from OEMs to remain stable and support revenue growth. "Further, balance sheets, though not debt-free, remain at moderate levels, adequate to fund capital expenditure (capex) and working capital needs," the report said.

Key Demand Segments

Crisil said OEM demand continues to remain healthy, supported by new vehicle launches, infrastructure-led commercial vehicle activity, premiumisation in the two-wheeler segment and growing adoption of electric vehicles. "OEM demand, which regained momentum post the goods and services tax (GST) rate reduction last year, remains steady with new model launches across passenger vehicles, infrastructure-linked commercial vehicle activity, continued premiumisation in two-wheelers and rising electric vehicle adoption across segments providing the tailwind," it said.

The report also said the aftermarket segment remains stable due to the large number of vehicles sold in recent years. Exports are expected to grow 8-9 per cent year-on-year, aided by tariff corrections in the United States, India's largest export market. "The aftermarket is stable, buoyed by large stock of vehicles sold in prior years. Exports are expected to grow 8-9% on-year, aided by tariff corrections in the United States, the largest export market, though longer shipping routes have increased lead times," the report noted.

According to Crisil, resilient revenue growth is expected to help maintain stable absolute operating profits for the sector. (ANI)