Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Markets / Mark To Market/  Auto sales slump drags fortunes of auto parts makers downhill
BackBack

Auto sales slump drags fortunes of auto parts makers downhill

The after-market demand for components, which accounts for 18% of the industry turnover, has also slowed
  • Automobile exports from OEMs were up by a paltry 1% year-on-year in the first six months of FY20
  • Cars are seen parked in a dock at the Chennai Port Trust. (PTI)Premium
    Cars are seen parked in a dock at the Chennai Port Trust. (PTI)

    A variety of issues— domestic and global— are challenging growth prospects of auto component makers. From the risk of a demand slowdown in automobiles that started about a year ago, the component industry’s problems are steadily compounding, with trade tensions across international markets and a broad-based slowdown in the parent auto industry across markets.

    On the back of a weak first quarter, analysts have forecast a dismal Q2 FY20 performance for the sector.

    Domestic sales of leading original equipment manufacturers (OEMs) such as Maruti Suzuki India Ltd, Hero MotoCorp Ltd and Ashok Leyland Ltd fell 30%, 21% and 45% respectively in Q2 from a year earlier.

    Graphic by Santosh Sharma/Mint
    View Full Image
    Graphic by Santosh Sharma/Mint


    Automobile exports from OEMs were up by a paltry 1% year-on-year in the first six months of FY20. Note that exports were up 21% year-on-year in the corresponding period of FY19.

    A report by Edelweiss Securities Ltd said, “OEMs have resorted to production cuts due to higher inventory, which is likely to keep revenue growth of ancillaries under check." Analysts have forecast the year-on-year revenue fall in Q2 may be sharper than Q1 for component makers.

    Component makers are unlikely to gain much from soft commodity prices or from corporate tax cuts, given the lack of pricing power with OEMs who are struggling to prune inventory.

    Crisil Ltd estimates a 160-180 basis point dip in FY20 operating margins for the component sector, despite lower raw material prices as demand remains weak.

    Since April, shares of the companies mentioned above have fallen by a steep 15-20%.

    To be sure, some component segments such as batteries and tyres, which have a dependence on the replacement market, may weather the slowdown better. But with the industrial slowdown spreading to areas outside of the auto universe, even diversified firms such as Bharat Forge Ltd will be under pressure.

    Rating agency Icra Ltd recently revised its outlook for the sector to negative. In addition to the slowdown woes of OEMs, it said that even after-market demand for components, which accounts for 18% of the industry turnover, has slowed. Tight liquidity at dealers has led to destocking, curtailing fresh demand for auto components.

    Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

    Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
    More Less
    Published: 17 Oct 2019, 07:00 AM IST
    Next Story footLogo
    Recommended For You
    GENIE RECOMMENDS

    Get the best recommendations on Stocks, Mutual Funds and more based on your Risk profile!

    Let’s get started
    Switch to the Mint app for fast and personalized news - Get App