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Auto component industry likely to register double-digit degrowth in FY21: Ind-Ra

13 May 2020 Evaluate

India Ratings (Ind-Ra) in its latest report has said that auto component industry is likely to register a second consecutive year of a double-digit degrowth in the current financial year (FY21) mainly on account of disruption in operations due to coronavirus (Covid-19) outbreak and the subsequent lockdown. It noted that the counter measures are likely to lead to lower income levels, weaker consumer sentiments, production disruptions, decreased industrial output as well as lesser movement of vehicles, resulting in a decline in global automobile demand and therefore, lower revenue and profitability for auto ancillaries in FY21.

Ind-Ra expects that the auto ancillaries industry on an average could record at least 100bp EBITDA margin decline in FY21 and the profitability decline for export focused auto ancillaries could be steeper as exports earn higher margins. It said the lower commodity prices could aid the profitability for the sector, though only to a limited extent, due to pass-through agreements with OEMs and OEMs' higher bargaining power. Also, it said some benefit may accrue to companies with overseas manufacturing units, as certain economies have announced support measures to meet part of the fixed costs during the shutdown period. It added that a depreciated rupee rate could partly offset the decline in sales volumes; however, the benefit is not expected to be significant.

However, the report stated that the revenue and profitability of auto ancillaries focused on domestic markets are likely to fare better due to higher content per vehicle on the back of evolving regulatory norms including BS-VI applicable from April 1, 2020. It said entities with a large reliance on overseas markets are expected to face a higher demand risk as the key markets of the US and Europe have been the most impacted by the virus, which could lead to uncertain business conditions.

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