Weak rural income, waning demand impact revenue of auto component SMEs

Small and medium enterprises (SMEs) manufacturing auto components saw business worsen in the second half of FY19 as demand for automobiles —largely two-wheelers and passenger vehicles — slowed. Apart from weak rural incomes, demand was also impacted by an increase in insurance cost, absence of model launches and volatile fuel prices.

But not all SME clusters were affected. While those in Chennai, the National Capital Region and Pune mirrored the industry trend, the ones in Ahmednagar and Aurangabad bucked the trend because they largely cater for a two-wheeler major that grew faster than the industry last financial year.

The overall situation is unlikely to improve in FY20. CRISIL Research expects growth in automobile production to almost halve from an already muted 7 per cent seen the last financial year, which, in turn, will impact component makers.

But a sharper deterioration in revenue will be averted because of an increase in realisation stemming from more stringent vehicle safety regulations.

The auto component industry depends heavily on domestic vehicle makers, which account for 65 per cent of total demand in value terms. Exports and replacement comprise 19 per cent and 16 per cent, respectively, of the remaining demand. 

Within the auto component space, the share of SMEs is 25-30 per cent of the industry’s turnover. SMEs are significant manufacturers of low-tech, high-volume components, including suspension and brake parts, bolts, washers, and body and chassis units.