FY23 Auto Ancillaries: Demand Recovery, Although Raw Material Prices To Remain High

India Ratings and Research (Ind-Ra) has revised the outlook for the auto ancillary sector to neutral for FY23 from improving. Ind-Ra expects the sector revenue to grow 10%-15% yoy in FY23, post growth estimated at 20%-25% yoy in FY22, supported by moderate growth of 5%-9% yoy in original equipment manufacturers' volumes and continued healthy exports. Demand from the aftermarket is likely to provide a steady contribution. In addition to the volume growth, the realisations would be aided by a) the full-year impact of higher selling prices, as higher raw material prices in FY22 would largely be passed on by early FY23, and b) a continued increase in the sales to the medium and heavy commercial vehicles segment which are of a higher value than other segments.

The agency expects profitability margins to remain flat to increasing marginally in FY23, as better operating leverage would be offset by firm commodity prices (such as steel, aluminium, copper, crude derivatives), continued supply chain issues (though somewhat softened) and increased logistics cost due to higher fuel prices. Ind-Ra estimates the sector margins to decline by 100-120bp in FY22. The sector performance remains exposed to downside risks, including those from evolving geopolitical tensions and any subsequent COVID-19 waves.

Ind-Ra believes that the emphasis would remain on sweating assets to boost return ratios. However, capex is expected to be higher in FY23 in lieu of the onset of capex under the auto component and advanced chemistry cell batteries production-linked incentives schemes. The sector's renewed focus on investments in R&D, technological tie-ups and/or inorganic acquisitions would continue in the near-to-medium term.

Ind-Ra has maintained a Stable Outlook for its rated portfolio of issuers in the auto ancillary sector for FY23. After two successive years of downgrades exceeding upgrades, the frequency of downgrades has mellowed in FY22 and Ind-Ra expects the same to remain for FY23.