Automotive component sector likely to clock 7-9% revenue growth in FY26: Crisil

Domestic automotive component sector is expected to clock 7-9 per cent revenue growth this fiscal, mirroring last fiscal, driven by sustained demand momentum from two-wheelers and passenger vehicles segments especially utility vehicles, which account for nearly half of the overall revenue, ratings agency Crisil said on Wednesday.

It also said that while a moderate uptick in commercial vehicles and tractors sales (around 17 per cent share) will provide an additional tailwind, the aftermarket segment (15 per cent share in revenue) is seen ticking along steadily at 5-7 per cent.

However, weak demand for new vehicles in the US and Europe (around 60 per cent of India's exports), presents headwinds.

"Demand from automotive OEMs, contributing two-thirds of total revenue, is expected to grow 8-9 per cent this fiscal, with value outpacing volume on rising safety, emission and electronic content, especially in PVs and 2Ws," said Poonam Upadhyay, Director at Crisil Ratings.

The aftermarket segment will log a steady 6-7 per cent growth, supported by an ageing vehicle base, she said, adding export growth, however, will moderate to 7-8 per cent amid weak demand for internal combustion engine vehicles and a deceleration in electric vehicle adoption across the US and Europe.

The US, while contributing just around 5 per cent to total revenue, commands a dominant 28 per cent share of export earnings and is the fastest-growing auto component market, said Crisil.

The 25 per cent tariff planned by the US can hurt companies heavily reliant on this geography, as per the ratings agency.

According to Crisil, operating margins are seen stable at 12-12.5 per cent, driven by growing share of high-margin components such as ADAS (Advanced Driver Assistance System) modules, infotainment systems and advanced braking.

A decline in input cost -- particularly of steel (45-50 per cent share in input costs), aluminium (15-20 per cent), and plastics (10-12 per cent) -- used for structural rigidity, reducing vehicle weight and for interiors will support profitability.

But pressure from new tariffs can dent the margins of companies exporting largely to the US, it stated.

As per Crisil, continuing high capital spend will be funded primarily by internal accruals. This, along with tight control over working capital, will ensure low dependence on external borrowing, keeping credit profiles stable.

"The share of high-margin, technology-intensive components now account for around 27 per cent of the segment's revenue, up from around 18 per cent before Covid-19, driven by premiumisation, and stricter emission norms," said Anil More, Associate Director, Crisil Ratings.

This structural shift, along with easing input costs, will help players sustain operating margins at 12-12.5 per cent this fiscal despite the global headwinds. However, companies with high export dependence on the US market may see margins compress 125-150 basis points amid limited ability to pass on tariffs, according to him.

The rating agency also said that the sector's credit outlook for this fiscal is stable owing to strong cash flows and minimal debt addition, despite sustained capex of around Rs 22,000 crore for scaling EV capabilities, automation and precision manufacturing - in tune with model launches that increasingly feature EVs.

However, with EVs forming just around 4 per cent of PV volume, their revenue contribution remains marginal, keeping returns from this category of vehicles muted in the near term, Crisil said.