Auto component suppliers are likely to witness over 70 per cent decline in operating profits during first quarter of current financial year (Q1 FY22) due to Covid 2.0 lockdown restrictions, investment information firm ICRA said on Tuesday.
Their challenges will be further compounded by sharp increase in commodity prices which are generally passed through to original equipment manufacturers (OEMs) with a lag of three to six months.
However, said ICRA, adequate liquidity across most rated investment grade auto component suppliers should help them to tide over pandemic-related headwinds.
While the production volumes were stable in April, retail sales declined sharply during the last two months indicating inventory build-up in the system.
Industry volumes are expected to remain muted in June as well with many OEMs and suppliers currently operating in single shifts.
The industry is also witnessing pressure on the raw materials front, impacted by the record-high commodity prices, said ICRA.
Commodity prices are expected to remain elevated in H1 FY22 before softening in H2. However, the current year's average commodity prices are expected to be at a multi-year high.
Another cause of concern is shortage of electronic components and increase in semi-conductor prices, said ICRA.
"ICRA estimates a revenue loss of 30 to 40 per cent quarter-on-quarter. This will translate into a sequential decline in EBIDTA of over 70 per cent during Q1 FY22 for the industry," said Vinutaa S, Assistant Vice President and Sector Head at ICRA.
However, the overall industry revenue will still be almost double than Q1 FY21 level, she said. Exports have come to the industry's rescue in the last few months when domestic demand nosedived due to lockdown restrictions.
Suppliers dependent solely on domestic OE demand have been the worst impacted, said Vinutaa.
Notwithstanding the short-term headwinds, ICRA expects domestic auto component industry to register 20 to 23 per cent revenue growth in the current fiscal year, supported by double-digit volume growth across most automobile sub-segments and impact of commodity inflation on realisations.
Stable after-market business and strong growth in auto component exports will further add to the industry's revenue growth in the current fiscal year.