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Auto Component Industry Likely to Incur Capex of INR 20,000-25,000 Crore in FY25: ICRA Report ICRA expects the growth in the revenues of the Indian auto component industry to ease to 5-7 per cent in FY2025

By Aditya Pran Mahanta

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From the highs of 14 per cent in FY2024, the growth in the revenues of the Indian auto component industry to ease to 5-7 per cent in FY2025, as per report from ICRA. Operating margins are projected to improve by approximately 50 basis points (bps) year-over-year (YoY) in FY2025, driven by enhanced operating leverage, increased content per vehicle, and value additions. However, these gains remain vulnerable to significant fluctuations in commodity prices and foreign exchange rates. Additionally, ICRA forecasts that the industry will invest between INR 20,000-25,000 crore in FY2025 for capacity expansion and technological advancements. This capital expenditure is expected to constitute around 8-10 per cent of operating income over the medium term. The production-linked incentive (PLI) scheme is also expected to boost capital investments in advanced technology and electric vehicle (EV) components.

"ICRA's interaction with large auto component suppliers indicates that the industry has incurred a capex of over INR 20,000 crore in FY2024 and is estimated to spend another INR 20,000 - 25,000 crore in FY2025. The incremental investments would be made towards new products, product development for committed platforms, and development of advanced technology and EV components, apart from capex for capacity enhancements and upcoming regulatory changes. R&D, though, is still at an average of 1-3 per cent of operating income, significantly lower than the global counterparts. ICRA expects auto ancillaries' capex to hover around 8-10 per cent of operating income over the medium term, with the PLI scheme also contributing to accelerating capex towards advanced technology and EV components," elucidate Vinutaa S, vice president and sector head – corporate ratings, ICRA.

The anticipated slowdown in revenue growth for FY2025 is attributed to the expected deceleration in the domestic original equipment manufacturer (OEM) segment. On the export side, new vehicle registrations in Europe and the US are projected to remain sluggish in the coming quarters due to the weak global macroeconomic environment and geopolitical tensions. However, Indian auto component exporters stand to benefit from increased supplies to new platforms, driven by vendor diversification initiatives from global OEMs and Tier-I players, as well as higher value addition resulting from increased outsourcing.

The industry's liquidity position remains strong, particularly among Tier-I players, supported by stable cash flows and earnings. ICRA expects the sector's coverage metrics to remain favourable, bolstered by healthy amassment and relatively low incremental debt funding despite rising borrowing costs. Most auto ancillary companies rated by ICRA are investment grade, reflecting a robust credit profile supported by stable cash increment and manageable debt levels. Since FY2022, rating upgrades have outnumbered downgrades, indicating an improvement in credit profiles over the past several quarters.

Currently, only 30-40 per cent of the EV supply chain is localised. Locally manufactured components include chassis parts that require minimal technological upgrades. There has been significant localization in traction motors, control units, and battery management systems over the years. However, battery cells, which account for 35-40 per cent of vehicle costs, are still entirely imported.

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