Covid-19 pandemic a big blow for auto-component SMEs: CRISIL SME Tracker

Small and medium enterprises (SMEs) in the auto parts industry are expected to take a huge blow from Covid-19 pandemic-related developments in the current fiscal year.
 

The pandemic is expected to impact both supply and demand for the industry. The nationwide lockdown imposed till April 14 has brought production to a standstill, and will hurt even more if it is extended. And demand sentiment is expected to remain muted even when the lockdown is lifted.
 

Thus, the industry is likely to be impacted adversely in the first quarter, and to an extent in the second quarter as well, though things are expected to improve gradually in the second half of this fiscal.

As things stand, 66 per cent of demand for auto components comes from original equipment manufacturers (OEMs), 19 per cent from exports, and the remaining 15 per cent from the replacement market.

SMEs, which make up a third of the industry and are largely Tier-II and Tier-III players catering to the requirements of Tier-I players, the replacement market, and OEMs to an extent, are likely to be hit hard.

In FY 2020, demand for these SMEs declined 12 per cent in value terms, as OEM production across asset classes declined by 11-33 per cent. Though replacement demand cushioned the fall to an extent, players still operated below optimum capacity utilisation.

In FY 2021 as well, demand for auto components is expected to decline, given the production disruption and muted demand prospects. Volume demand from OEMs is estimated to decline 7-15 per cent across asset classes.
 

Export demand is expected to decline 15 per cent in value terms, as over 50 per cent of exports are to Europe and the US, and demand from those markets is expected to decline owing to Covid-19.
 

Replacement demand is expected to log a modest growth of 3 per cent (in value terms), as people refrain from buying new vehicles.