 "Muted exports for auto sector in FY25 amid weak overseas demand: Ind-Ra")
In a report released by India Ratings and Research (Ind-Ra), it was revealed that auto-ancillaries and auto exports will remain subdued in FY25 due to likely weak demand from Europe and the US. Despite a modest increase in auto ancillaries' export revenue of 2.7 per cent year-over-year (Y-o-Y) in the first half of FY24 and 5.2 per cent Y-o-Y in FY23, future growth is expected to be affected by economic challenges (macroeconomic headwinds) and geopolitical issues that are likely to impact exports from Q4FY24 to H1FY25, consequently affecting the overall exports revenue for FY25.
A slowdown in demand from both domestic commercial vehicle manufacturers and subdued exports could limit revenue growth to a range of 6-8 per cent year-over-year. Demand for replacement parts from overseas markets might take a bigger hit compared to demand from original equipment manufacturers (OEMs). This is because OEMs are actively looking to diversify their supply chains and reduce dependence on traditional sources like China and Europe. Consequently, auto ancillary companies that rely heavily on the overseas replacement market could face challenges.
Shruti Saboo, Director of India Ratings and Research, stated, “The export of vehicles dropped by 12 per cent Y-o-Y during 9MFY24, and is likely to remain subdued over 4QFY24 – 1HFY25. Two-wheelers and three-wheelers, which together account for more than 80 per cent of the vehicles exported, were impacted as the key exporting nations like Africa and South Asia continue to face macroeconomic headwinds like high inflation, limited availability of foreign exchange, and weakened currencies. Even for auto ancillaries, exports could remain moderated in 1HFY25, on account of likely subdued demand from European and US markets, which account for more than 60 per cent of the overall exports.”
Regarding the economic challenges, Saboo further added, “The demand moderation is likely on account of ongoing macroeconomic headwinds in these markets. The Red Sea issue could also have an intermediate impact as the supplies could take longer and also become costlier, especially for replacement markets. However, with a strong order book with Indian auto ancillaries from global OEMs / tier 1 suppliers, as they look to diversify their supply base outside of China & Europe, exports should start to recover gradually from 2HFY25.”
Ind-Ra does not expect the Red Sea crisis to cause immediate disruptions in the near future. However, a prolonged conflict could lead to higher freight costs, making Indian-made components less competitive, particularly in the replacement market where price sensitivity is high. Overall, Ind-Ra has maintained a neutral outlook for the auto ancillary sector in FY25, but growth is likely to be modest due to a slowdown in exports and domestic commercial vehicle demand.