New Delhi: India Ratings and Research has revised its outlook for the domestic automobile component manufacturing industry to ‘improving’ from ‘negative’ amid faster-than-expected revival in production of passenger vehicles and two-wheelers in the last six months. Recovery in exports and aftermarket sales will also help boost earnings in FY22, the credit rating agency said.

Since September, vehicle manufacturers and their vendors have ramped up production faster-than-expected to meet retail demand which got a boost from improving economic activity and shift towards personal mobility.

“The agency previously expected the sector revenues to record a 16%-20% y-o-y decline in FY21, followed by a recovery of 12%-15% y-o-y in FY22. However, with a strong 3QFY21, and the likelihood of a sustained demand in the coming quarters, the agency now expects the revenue decline to be limited to 10%-12% y-o-y in FY21, followed by a recovery of 18%-20% in FY22,” analysts of India Ratings said in a note.

“The growth would be driven by both domestic original equipment manufacturers (OEMs) and exports. Ind-Ra expects OEMs sales volumes to increase by 16%-20% y-o-y in FY22, following an estimated contraction of 14%-18% y-o-y in FY21. The agency also expects exports and aftermarket segments growth to remain in line or marginally better than OEMs,” they added.

The note further said a better operating leverage and leaner cost structure carried over from FY21 are expected to propel margins by 100-150 basis points on a year-on-year basis in FY22, despite raw material price headwinds and supply chain disruptions. Credit metrics are likely to improve in FY22, although remain slightly weaker than FY20 levels.

The ratings agency expects capex of auto component manufacturers to resume in FY22, led by capex deferrals from FY21, debottlenecking activities and expansions with committed off take. Although the capex intensity is likely to remain subdued compared to historical levels, it will increase from FY21 levels.

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