Moneycontrol Pro Panorama | Auto component sector cranking it up

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Automobile companies faced a protracted recovery from COVID-19 disruptions. Their sales, with the exception of two-wheelers, crossed pre-pandemic levels only in recent months. Production and domestic sales volumes of the automobile sector in FY22 are still way below FY19 levels. Revenue at Maruti Suzuki India, India’s largest passenger carmaker, barely crossed FY19 levels in FY22. The FY22 sales and revenue of Hero MotoCorp, a large two-wheeler marker, are well below pre-COVID levels.

In comparison, companies that supply components to these original equipment manufacturers (OEMs) -- industry-speak for auto companies -- have seen a faster recovery. The automotive component industry's turnover increased by 23 percent in FY22 to Rs 4.20 lakh crore, outpacing Rs 3.95 lakh crore of revenue in FY19. Their recovery was aided by healthy traction in exports, share of wallet gains (share of an OEM's supply requirement) and greater sourcing by global automobile companies from Indian producers. Despite the pandemic-related disruption, exports grew at an average annual pace of 7.7 percent between FY19-22, better than that of the total components industry.

Do note that the turnover figures are boosted by cost inflation. Raw material cost per unit increased by around 11 percent in FY22, industry body Automotive Component Manufacturers Association of India (ACMA) said in a presentation. Still, the industry performance is encouraging and provides cues about opportunities in the automobile sector.

What’s more, the industry association sees scope for healthy performance in FY23 also. New product launches, higher sales during the festive season, localisation of more components and development of the electric vehicle value chain are expected to aid business. The latest survey of dealers by Nirmal Bang Institutional Equities in the central, northern and western parts of the country suggests good and sustained consumer interest in passenger vehicles. Even two-wheelers could see sales recover during the festive season if current consumer interest holds up, according to these channel checks.

If that is good news on the manufacturing side of the industry, there is some sobering news from the services side. The challenges for India's IT sector, another large industry in India, are getting more pronounced. After Wipro and Tata Consultancy Services (TCS), Infosys has reduced the variable payout for employees. Earlier, TCS and Wipro had delayed variable compensation for certain sections of the employees.

The moves come amid raging cost pressures for these IT companies. While efforts to raise prices have met with limited success till now, readers may note that companies had pointed to healthy demand and a tight worker market during the recent June quarter results. While this logically calls for favourable employee compensation policies, the measures to rationalise employee expenditure indicates continuing pressure on profit margins, says an analyst who tracks the sector. You can read our full story here. The Nifty IT index is down 2 percent in afternoon trade.

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Technical Picks: Reliance Industries, L&T, Wipro, Gold mini and NMDC  (These are published every trading day before markets open and can be read on the app)

R Sree RamMoneycontrol Pro