Supply chain disruptions in the wake of COVID-19 outbreak coupled with weak demand for vehicles in India and overseas is likely to squeeze the revenue of the automotive component sector by 16 percent this fiscal, says a report. This will add to the pain from an estimated de-growth of 10 percent in the industry's revenue to Rs 3.2 lakh crore last fiscal, CRISIL Ratings said in its report on Tuesday.
The growth projections are based on an analysis of 300 CRISIL-rated auto component suppliers that account for 40 percent of the sector's revenue, it said.
"The automotive component sector is expected to log around 16 percent de-growth in revenue this fiscal as the COVID-19 pandemic disrupts the supply chain and impairs underlying vehicle demand in both domestic and overseas markets," CRISIL Ratings said.
According to the report, the domestic original equipment manufacturers (OEMs), which account for over two-thirds of the sector's revenue, are staring at a decadal low vehicle sales volume at 169 lakh units this fiscal with the production schedule of the manufacturers likely to remain modest in the first two quarters of the fiscal followed by a gradual recovery, CRISIL Ratings said.
Additionally, demand growth from exports and the aftermarket, which together account for around one-third of demand, will also remain in the red this year.
Muted demand sentiment in major export destinations will dent exports, while lower vehicle usage and closure of automotive servicing workshops during the lockdown will affect aftermarket demand, the report stated.
"Possibly for the first time in over a decade, we are seeing demand from OEMs, exports and the aftermarket in the red this fiscal, in addition to demand slowdown for two consecutive years," said Anuj Sethi of CRISIL Ratings.
Despite cost rationalisation measures and the highly flexible nature of cost structures, with 80 percent of costs being variable in nature, operating profitability will take a hit of up to 250 basis points for the rated portfolio, while the impact on absolute operating profit will be almost 30-35 percent, he added.
"The only silver lining is the sector's prudent financial practices with respect to capital spending over the past few years, leading to well managed balance sheets," said Sameer Charania, Director, CRISIL Ratings.
The average gearing for CRISIL's sample set remains adequate at less than one-time and is expected to remain under control due to only need-based capital spending and a modest stretch in working capital, he said.
Firms with component concentration to commercial vehicles and those which have undertaken large debt-funded expansion in recent times will be more vulnerable than more-diversified ones, the report stated.
While the RBI's moratorium on debt obligations for firms and steps initiated to provide funding to MSMEs (including smaller tier II and tier III suppliers) may help overcome temporary cash-flow mismatches, recovery in demand, which is expected in the next fiscal, is critical for sustained and improvement in the sector's financial health, it said.
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