Automotive slowdown: Ancillary sector stares at hard times ahead

The markets might be cheering, but with any possible relief from the government’s stimulus measures likely to trickle down only months later, India’s automotive ancillaries sector is likely heading for even stormier waters.

While several thousand jobs have been lost already due to the slowly expanding impact of two-decade lows in automobile sales, analysts expect little improvement over the near-term.

“Cash flows and net leverage ratio would deteriorate because of lower operating profitability and continuing, albeit lower, debt-funded capex for meeting regulatory requirements as well as for the committed capacities,” India Ratings and Research said on Monday, downgrading the current fiscal year’s (FY20) outlook for the auto ancillary sector from stable to negative.

“The outlook revision reflects the agency’s expectations of continued weaker-than-envisaged operating performance and credit metrics amid a challenging economic environment,” it added.

According to experts and industry data, manufacturers in the Indian auto sector have seen a de-growth of 16 per cent in just the first five months of the current financial year.

The downtrend in demand has spoken across the sector to almost all segments. “... all sub-segments witness(ed) negative growth, primarily due to subdued urban and rural consumption, weak credit availability, and the rising cost of ownership, resulting from higher fuel, interest and insurance costs,” said India Ratings.

This, combined with the consequent cut in production days by all major auto and its component makers, has gone on to hit auto ancillary demand hard.

However, there is likely to be some mitigation of the negative impact due to good forecasts for festive season sales and buying before the BS-VI norms are rolled out in April next year.

According to the research firm, manufacturers will record positive growth, albeit single-digit, over the second half of the fiscal year.

“For auto ancillary companies, the weak demand from OEMs is likely to be partly mitigated by continued moderate replacement demand, albeit at lower yoy levels, and a likely rise in content per vehicle because of evolving regulatory norms.

Based on these factors, Ind-Ra expects the revenues of players to register low single-digit growth yoy in FY20,” India Ratings said.

According to analysts, this will also have a direct impact on profitability.

“The weakness in demand and delays in ramp-up of capacities would lead to higher operating leverage, which would adversely affect the profitability margins of companies. Benefits arising from softening in key raw material prices (ex-rubber) and the low likelihood of any major disruption over FY20 would be limited,” the analysts said.