India Ratings and Research (Ind-Ra) said on Tuesday the domestic auto sector can continue to face supply chain headwinds, especially due to semiconductor chips shortages, over the remainder of FY22. This is likely to curtail sales growth expected for auto industry, particularly in passenger vehicles (PV) segment and also adversely impact profitability.

Ind-Ra expects the semiconductor chips shortage to continue until end-1H22 although the availability could gradually improve over this period. It further expects original equipment manufacturers (OEMs) to reassess their supply chains to diversify and/or partially localise their raw material requirements over the near to medium-term.

The government through the launch of investment schemes has showcased heightened focus on electronics manufacturing, including semiconductors. However, as the build-up and ramp-up of semiconductor capacity is a lengthy process, any investments are likely to aid local supply chains only over the medium to long term.

Ind-Ra believes that the demand tailwinds for PV segment remain intact. However, the semiconductor supply scenario is evolving and hence the supply-side shortage could affect OEM production volumes, and thereby the growth in sales volumes. Hence, Ind-Ra has revised down the expected sales volume growth in the PV segment to 15 to 18 per cent from 18 to 22 per cent for FY22. The chip shortage could affect finished vehicle inventory levels in the next few months and lead to supply-side pressures during the festive season in 3Q.

Already, the waiting time for some of the popular models exceeds three months. However, to manage the situation better, OEMs are keeping higher inventory at dealership level. The PV inventory at dealers was 30 to 35 days as of end-July.