Margins set to improve for auto component makers in 2016

Auto component makers including aluminium and aluminium alloy based die-cast component manufacturers may finally turn in a decent performance in the year to March. A few quarters ago, the industry was worried, given the prolonged auto slowdown in global markets, especially Europe and the US, and sluggish sales across most segments in domestic markets.

These concerns were mirrored in the underperformance of shares of leading auto component makers over the last one year. Stocks of companies like Motherson Sumi Systems Ltd and Bharat Forge Ltd that have supplies to overseas original equipment (OE) makers have been battered more as exports slowed down.

But there are reasons for optimism now, observe analysts. Domestic sales in India, which account for most part of the total auto component market, are steadily inching up. OE demand is mainly from medium and heavy commercial vehicles, which was triggered by fleet replacement, which was overdue, and some regulatory changes for trucks. Also, demand for lorries picked up after the mining ban was lifted.

Meanwhile, component supplies to multinational car firms who have set up plants in India for exports will gain traction in the medium term.

On the replacement market, demand from passenger cars and two-wheelers is already robust. Forecasts are that the second half of fiscal year 2016 will be better than the first, with higher contribution to sales from the after sales market in the south where post torrential rain, demand for repairs and service is likely to go.

Exports of aluminium and other metallic alloy based auto components are likely to grow by around 12-15% in 2015-16 compared with the previous year, although on relatively lower base. Commercial vehicle sales in developed markets is picking up in Europe though US market is still erratic. But there are signs of recovery in car sales too.

Note that on the whole, component firms’ margins would improve by about 100-150 basis points year-on-year, even though the sales growth may be modest. One basis point is one-hundredth of a percentage point. Explaining this, Anuj Sethi, director, Crisil Ratings, said, “Prices of most commodities like aluminium and other metals are at decadal lows and this is normally passed through to the customers. Hence, while realizations would decline or remain flattish in 2015-16, overall sales growth will be driven by volumes. Operating margins too would improve on the back of lower costs, provided employee costs are contained.”

Better profitability should augur well for investors too. In any case, sector experts say that the worst is over for the auto sector as a whole. Auto components cannot be far behind, then.