Indian auto ancillary industry to witness slower growth in FY25 and FY26: ICRA

Domestic rating agency firm ICRA expects the revenue growth of the Indian auto component industry (represented by a sample of 46 auto ancillaries with aggregate annual revenues of over ₹3,00,000 crore in FY2024, accounting for close to 50% of the industry) to ease to 7-9% in FY2025 and 8-10% in FY2026, from the highs of 14% in FY2024.

It expects operating margins to remain range-bound and hover at 11-12% in FY2025 and FY2026, supported by benefits from operating leverage, higher content per vehicle, and value addition while remaining vulnerable to any significant unfavourable movements in commodity prices and foreign exchange rates.

The disruption along the Red Sea route has resulted in a surge in ocean freight rates by 2-3 times in CY2024 compared to CY2023. Any further sharp and sustained increase in ocean freight rates could also have a bearing on margins for auto component suppliers having significant exports/imports. ICRA estimates the auto component industry to incur a capex of ₹25,000-30,000 crore in FY2026 towards capacity expansion, localisation/capability development, and technological advancement (including EVs), among others.

Opportunities ahead

The agency stated that currently only 30-40% of the EV supply chain is localised. The agency highlighted that while traction motors, control units, and battery management systems have achieved significant localisation over the years, battery cells—which account for 35-40% of vehicle costs—remain entirely imported. The limited localisation in this segment presents a substantial opportunity for domestic auto component manufacturers to expand their production capabilities.

Vinutaa S, Vice President and Sector Head, Corporate Ratings, ICRA Limited, said, “ICRA’s interaction with large auto component suppliers indicates that the industry is estimated to spend ₹15,000-20,000 crore in FY2025 and another ₹25,000-30,000 crore in FY2026. The incremental investments would be made towards new products, product development for committed platforms, and the 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% of operating income, significantly lower than the global counterparts. ICRA expects auto ancillaries’ capex to hover around 7-8% of operating income over the medium term, with the PLI scheme also contributing to incremental capex towards advanced technology and EV components.”

Further, ICRA said there would be opportunities for Indian players in metal castings and forgings because of the closure of plants in the European Union (EU) due to viability issues. The ageing of vehicles and the sale of more used vehicles in global markets would aid in exports for the replacement segment. The impact of any import tariffs on Indian auto component exports remains monitorable. Electric vehicle (EV)-linked opportunities, premiumisation of vehicles, a focus on localization, and changes in regulatory norms would support growth for auto component suppliers over the medium to long term, the agency stated. 

“Exports, which account for close to 30% of the industry’s revenues, are likely to be impacted by subdued vehicle registration growth in the target markets. However, factors like rising supplies to new platforms because of vendor diversification initiatives by global OEMs/Tier-Is and higher value addition, partly stemming from an increase in outsourcing, augur well for Indian auto component suppliers,” said Vinutaa.

Most of the auto ancillary players rated by ICRA are in the investment grade, and rating upgrades have been significantly higher than downgrades in the last 2-3 years, indicating improvement in the credit profile. ICRA expects coverage metrics and liquidity for the sector to remain comfortable going forward, aided by healthy accruals and relatively low incremental debt funding.

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