India Ratings and Research (Ind-Ra) has revised its outlook for the auto ancillary sector to improving for FY22 from negative.
It has also revised the outlook on its rated portfolio to stable from negative. The agency previously expected the sector revenues to record a 16 to 20 per cent year-on-year decline in FY21 followed by a recovery of 12 to 15 per cent in FY22.
However, with a strong 3Q FY21 and likelihood of sustained demand in coming quarters, Ind-Ra now expects the revenue decline to be limited to 10 to 12 per cent in FY21 followed by a recovery of 18 to 20 per cent in FY22.
The growth will be driven by both domestic original equipment manufacturers (OEMs) and exports. Ind-Ra expects OEMs sales volumes to increase by 16 to 20 per cent in FY22 following an estimated contraction of 14 to 18 per cent in FY21.
It also expects exports and after-market segments growth to remain in line or marginally better than OEMs.
A better operating leverage and leaner cost structure carried over from FY21 are expected to propel margins by 100 to 150 basis points in FY22 despite raw material price headwinds and supply chain disruptions.
Credit metrics are likely to improve in FY22 although remain slightly weaker than FY20 levels. The agency expects capex spending to resume in FY22 led by capex deferrals from FY21, debottlenecking activities and expansions with committed offtake.
Although the capex intensity is likely to remain subdued compared to historical levels, it will increase from FY21 levels. The agency expects the sector's focus on cash flow allocation towards profitable assets to continue along with reducing exposure in loss-making ventures.
The pandemic-led supply chain disruptions have solidified thrust on localisation for the sector, said Ind-Ra.
While the fine print is awaited, the Performance-linked Incentive Scheme and Vehicle Scrappage Policy can create competitive advantages and growth opportunities for the segment in medium to long term.
( With inputs from ANI )
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