Auto parts makers eye gains in the aftermarket

New Delhi: With lower taxes and a troubled grey market for automobile components, manufacturers are now focusing on aftermarket sales, sensing an opportunity to reduce their dependence on vehicle makers and strengthen operating margins.

Aftermarket, the secondary market where components are directly sold to garages, service stations or dealers, make up just a fifth of the total revenue of the auto component industry. But it has assumed significance amid falling supplies of cheap and illegal copies of parts— the so called grey market— because such manufacturers can be traced more easily in the GST regime.

Factors like these have given component manufacturers the room to focus on aftermarket sales, which provide better operating margins. Automotive component manufacturers such as Rico Auto Industries, Setco Automotive Ltd and SteelBird International are focusing on increasing their revenues from this segment.

Rico Auto, which is a player in the two-wheeler aftermarket, has recently announced its foray in the aftermarket for four-wheelers. The aftermarket operation of the company is projected to contribute ₹ 100 crore to the overall topline of the company by 2020, according to Arvind Kapur managing director and CEO of Rico Auto.

“After GST came into effect, grey market operations have come down significantly and second-hand or used-vehicles sales have also increased. So the sales in the aftermarket space are going to increase in the years to come. Hence we are investing in this space. In FY18, we earned about ₹ 10 crore from the after-market business,” said Kapur.

The total revenue of the component industry is $38 billion while the aftermarket segment contributes around $8 billion, according to Automotive Component Manufacturers Association (Acma). In developed country markets, this segment contributes almost 50% of the topline.

Setco Automotive Ltd, a supplier for the commercial vehicles arm of Tata Motors, earns almost 60% of its total revenue from the aftermarket segment. This percentage is expected to increase in the coming years as customers are now looking for genuine parts for their vehicles.

Tax rates levied on some of the automotive components are at 18% and 28% under GST compared to almost 32% in the pre-GST era, explained Manav Kapur, managing director, Steel Bird International, a two-wheeler component manufacturer with presence in the after-market. These manufacturers could get input tax credit now, which also helps.

The grey market flourished because original parts were seen as expensive.

“The aftermarket operations are more profitable but companies also need to understand that to sell products in this segment they need to change their approach from being engineering companies to marketing ones as is it requires a very different skill set,” explained Manav Kapur.

“After the introduction of GST many automotive component manufacturers have started to focus on aftermarket operations as it offers better operating margins compared to selling the products directly to OEMs. Also, the grey market operations have come down after the implementation of the GST leaving space for genuine manufacturers to fill that void. The component industry in the developed market earns 50% of its revenue from after-market while in India it’s just a fourth of the industry’s turnover,” said Vinnie Mehta, director general, Acma.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.