Indian Auto Ancillary Industry Set for Slower Growth in FY25 and FY26: ICRA
The Indian auto ancillary industry, a key player in the country’s automotive sector, is expected to experience a moderation in growth over the next two financial years. According to a report by domestic rating agency ICRA, the industry’s revenue growth is projected to slow down to 7-9% in FY2025 and 8-10% in FY2026, a significant dip from the 14% growth recorded in FY2024. The analysis is based on a sample of 46 auto component manufacturers, collectively accounting for nearly 50% of the sector, with annual revenues exceeding ₹3,00,000 crore in FY2024.
Revenue Growth to Moderate
The slowdown in growth is attributed to multiple factors, including subdued demand in export markets, rising commodity prices, and supply chain disruptions. Despite these challenges, ICRA believes that the industry’s fundamental drivers—such as an increasing focus on electric vehicle (EV) components, localisation efforts, and technological advancements—will support its long-term prospects.
Stable Operating Margins Amid Challenges
ICRA anticipates that the operating margins of auto ancillary firms will remain within 11-12% in FY2025 and FY2026. The report highlights key factors that will influence profitability:
- Operating Leverage: Larger production volumes will help maintain efficiency.
- Higher Content per Vehicle: With automakers introducing advanced technologies, the need for sophisticated auto components will rise.
- Value Addition: The shift toward premium and technologically advanced vehicles will benefit manufacturers.
- Commodity Price Volatility: Fluctuations in raw material costs and foreign exchange rates could pose risks.
- Surging Freight Costs: The disruption in the Red Sea trade route has led to a 2-3 times increase in ocean freight rates in 2024, further squeezing margins.
Investment & Expansion Plans
Despite the slowdown, the auto component industry is poised for significant investments to bolster its capabilities. ICRA estimates a capital expenditure (capex) of ₹25,000-30,000 crore in FY2026, primarily for:
- Capacity Expansion
- Localisation and Development of Advanced Technologies
- Enhancing Capabilities for Electric Vehicle (EV) Components
Vinutaa S, Vice President & Sector Head, Corporate Ratings at ICRA, noted that the industry is expected to invest ₹15,000-20,000 crore in FY2025, followed by ₹25,000-30,000 crore in FY2026. The Production-Linked Incentive (PLI) scheme will play a crucial role in driving investments toward advanced technology and EV-related components.
Opportunities in EV and Global Markets
One of the key growth areas for the industry is the electric vehicle (EV) segment. Currently, only 30-40% of the EV supply chain is localized in India, presenting a huge opportunity for domestic players. While traction motors, control units, and battery management systems have seen improved local production, battery cells (which contribute to 35-40% of vehicle costs) remain entirely imported. This gap creates a lucrative market for Indian manufacturers to expand their production capabilities.
ICRA also sees opportunities in the global market, particularly due to:
- The closure of metal casting and forging plants in Europe, making India a key alternative supplier.
- Rising demand for replacement auto parts as aging vehicles and used car sales increase in international markets.
- The shift in supply chains as global OEMs (Original Equipment Manufacturers) look to diversify vendors.
Export Market Challenges
Although exports currently account for about 30% of the industry’s revenue, they are likely to face headwinds due to sluggish vehicle registration growth in key markets. However, some positive trends can support exports:
- Vendor diversification by global automakers: More companies are looking to source from India.
- Higher value addition and outsourcing trends: Indian firms are increasingly supplying sophisticated components.
These factors could mitigate the impact of slower export demand and provide growth opportunities.
Credit Ratings & Financial Health
ICRA’s assessment indicates that most auto ancillary firms maintain an investment-grade rating, with rating upgrades outpacing downgrades over the past 2-3 years. The credit profile of the sector remains strong, driven by:
- Healthy earnings (accruals)
- Moderate debt levels
- Stable liquidity positions
Going forward, the coverage metrics and liquidity outlook for the industry are expected to remain comfortable, backed by strong revenue streams and manageable debt.
Financial Performance Snapshot
To provide a clearer picture of the industry’s performance, here are some key financial ratios:
| Parameter | FY2024 | FY2025 (Projected) | FY2026 (Projected) |
|---|---|---|---|
| Revenue Growth | 14% | 7-9% | 8-10% |
| Operating Margins | 11-12% | 11-12% | 11-12% |
| Capex (₹ Crore) | – | 15,000-20,000 | 25,000-30,000 |
| Localisation (EVs) | 30-40% | Improving | Further Expansion |
| Export Contribution | 30% | Slightly Impacted | Potential Recovery |
| PLI Scheme Impact | Moderate | Higher Investment | Significant Growth |
Conclusion
The Indian auto ancillary industry is set for a period of moderated growth in the next two years. While challenges such as global demand slowdown, freight cost surges, and commodity price volatility persist, opportunities in electric vehicle components, localisation, and global vendor diversification offer long-term growth potential.
With continued investments in capacity expansion and advanced technology, the industry remains resilient and well-positioned for future growth. As companies navigate challenges and capitalize on emerging opportunities, the sector is expected to play a crucial role in shaping India’s automotive future.
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Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Investors should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.