Auto component firms see capacity utilisation doubling to 60-95% levels

Most players expect strong demand during 45 day festive period, but tread cautiously as trend may not sustain later; Icra sees very few players going for debt recast

A sequential improvement in auto volumes the past few months has helped auto component makers reach pre-Covid capacity utilisation levels of 60-65 per cent in September. With the exception of those supplying to the commercial vehicles--a segment that has yet to see a broad-based recovery--most other auto component makers are bullish of the road ahead.

This is in sharp contrast to the narrative in the June quarter when a severe contraction in the order books had made firms skeptical of the recovery. But companies aren’t celebrating just as yet and continue to tread with caution. The real litmus test of demand sustenance will be the period post festivals. “We are optimistically cautious. There is a lot of demand pressure from customers even as the challenges related to supply chain continues. We hope the demand is sustainable post the festive season also,” said Deepak Jain, president at Auto Component Manufacturers (Acma).   

Nirmal K Minda, chairman and managing director, Minda Industries agrees: “We are hopeful of October and November. But not sure, the way demand will pan out from December onwards. We expect December volumes to drop 10 per cent once the festive demand dries up but if the drop is higher, it will be tough,” says Minda.    

 

Capacity utilization at auto component firms was hovering at sub 30 per cent for May and June 2020, as against breakeven of 40-45 per cent and pre-Covid capacity utilisation of 60-65 per cent, according to an ICRA report released on 8 October.  

“Interactions with passenger vehicles, two wheeler focused auto ancillary players like Minda, Varroc and Mahindra CIE suggest utilisation levels are back to ~75 per cent in September versus. sub- 30 per cent in first quarter,” according to an October 5 report by Ambit Capital.

This has come on back of an elevated production levels for key manufacturers like Maruti Suzuki India,  Royal Enfield,  Hero MotoCorp,  Tata Motors (PVs), to name a few. In fact, ancillary players are striving to fulfill demand amid constraints of limited work force and trying best to enhance productivity using limited resources while maintaining SOPs to avoid spread.

Icra notes that with sequential pick-up in production across all automotive segments (except for commercial vehicles) supported by pent-up demand and channel filling; gradual opening of export markets, capacity utilization for most auto component players (two wheelers, passenger vehicles and tractor) has been close to pre-Covid levels (at 60-65%) in September 2020.

 

The ratings agency expects accruals to improve significantly in FY2022 and believes that the proportion of entities opting for loan restructuring as part of KV Kamath Committee’s recommendation s, would be relatively low and largely restricted to the smaller players.

The recovery has been a confidence booster. “As of now I do not think that auto component is stressed. The situation ahead depends on projections of two and four wheeler customers,” said Hemant Agarwal, head of finance, Subros.   Subros is a supplier of car AC systems to several automakers.

After a near zero production sales month in April, auto sales have been improving every month since June.  Besides dispatches to dealers, retail volumes are also showing improvement for PVs, two wheelers retail continue to skid. A pent-up demand, positive rural sentiment, shift toward personal mobility and the fading impact of price hikes are driving sales.  “Wholesales have witnessed healthy growth in the same period due to inventory restocking with dealers, prior to the festive period. Inventory days have increased to 30- 40 days in PVs and 35-45 days in  two wheelers, according to a recent report by Emkay.