PTI: December 14, 2018
Mumbai: The capital expenditure by the domestic automotive component manufacturers is likely to be high at around Rs 24,000 crore over fiscals 2019 and 2020, to meet tightening regulations, R&D requirements and capacity expansion, rating agency Crisil said Thursday.
It noted that capex continues to be substantial, as it represents close to 20 per cent of the existing investment in fixed assets by component manufacturers.
To meet regulations and demand, the agency expects capex spend by vehicle makers to rise 30 per cent over fiscals 2019 and 2020, compared with the preceding two fiscals.
It added that component makers will also have to ramp up on investments in product development, and acquire technology faster than before, in order to remain relevant.
"Strong balance sheets and a recovery in business prospects in fiscal 2020 will help firms absorb the investments without materially affecting their credit risk profiles," it said.
The agency said that an analysis of around 225 automotive component firms, which accounted for over 60 per cent of sector revenue of around Rs 3.2 lakh crore in FY18, showed their capex in fiscals 2017 and 2018 increased by more than 20 per cent, compared with the two preceding fiscals, to nearly Rs 23,000 crore.
"Despite this high base, capex across sub-segments will remain elevated until fiscal 2020, driven by regulatory changes necessitating technology upgradation and product development (around 35-40 per cent of spend), even as majority spend will be incurred for incremental capacity," it said.
The new regulations include transitioning to Bharat Stage VI (BS VI) fuel norms by April 2020, increase in truck axle loads, suspension equipment for two-wheelers above 125 cc, air-conditioned cabins for trucks and crash tests.
It also observed that the government is also encouraging a shift to electric vehicles but said given inadequate infrastructure and raw materials, the transition is likely to be gradual, thereby limiting the impact on component makers in the near to medium term.
The rating agency expects the automotive component sector's revenues to grow at around 10 per cent between fiscals 2018 and 2020, compared with 11.5 per cent in preceding two fiscals.
The original equipment manufacturer (OEM) segment, which accounts for about two-thirds of revenues of component makers, could see a 10-11 per cent growth until fiscal 2020, driven largely by healthy demand from commercial vehicles, and better passenger vehicle and two-wheeler sales due to increased affordability, it said.
"Growth in the second half of fiscal 2019, though, would moderate temporarily due to lower passenger vehicle and two-wheeler sales stemming from higher insurance cost, interest rate, fuel prices and dealer stocks," it added.
While the aftermarket demand will remain steady, the agency expects exports to continue growing at almost similar rates as OEMs, on the back of steady demand for Class 8 trucks in the US, for petrol-engined passenger vehicles in Europe, and increasing penetration in Asia.
It further said that steady cash flows over the next two years will help component makers offset the impact of continuing large investments and ensure stability in their credit profiles.
Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.