The latest report on Friday indicates a substantial growth trajectory in the auto component replacement sector, with an estimated surge of 6-8 per cent in the upcoming fiscal year. The significant driving forces behind this impressive ascent are the escalating mobility quotient and flourishing freight movement, among a plethora of other factors.
The report compiled by credit ratings agency Icra points out that this growth spurt has positively impacted the cash flows of aftermarket dealers and garages. Furthermore, the liquidity status remains comfortable and stable, adding to the positive outlook of this promising domain.
Such a tremendous increase in demand for auto component replacement denotes a highly perplexing and unpredictable trend. The automotive industry is an intricate and complex ecosystem, with multifarious variables influencing the market dynamics. Hence, the sudden surge in demand represents a burstiness that could be indicative of a turbulent yet highly promising future for the sector.
Notwithstanding the present circumstances, the recent report by the credit ratings agency portrays a comparatively steady and secure outlook, accentuating the positivity arising from the surge in demand. However, the implications of such an unparalleled upswing in the industry can only be comprehended with the progression of time. Until then, the auto component replacement sector remains a mystery that the industry experts must persistently scrutinize and evaluate.
As per the latest report, the aggregation of receivables has not encountered any noteworthy predicaments hitherto. Moreover, Icra has observed that while there are optimistic prospects for medium-term demand, several factors may hinder growth, including the adoption of electric vehicles, the execution of a scrappage policy, elongation of component lifespan, and an amplified usage of public transportation in contrast to private vehicles.
The aftermarket division, which comprises around one-fifth of the overall demand, persists as a critical element of the Indian auto component industry, as emphasized in the report. Furthermore, the report indicates that the median age of medium and heavy commercial vehicles has reached almost ten years, while the median age of passenger vehicles has surged to 7.3 years in the fiscal year 2022, the highest in the preceding two decades, according to Icra.
These findings exhibit the intricacy and volatility of the auto component industry in India, emphasizing the necessity for continuous monitoring and analysis to apprehend the ever-changing dynamics of this sector.
Icra, a reputable credit rating establishment, has predicted that the replacement demand sector will see growth rates of 6-8% in the fiscal year of 2024. The upsurge in mobility, burgeoning economic activity, and the thriving movement of freight are the fundamental drivers of this growth.
As per Icra’s analysis, the delay in procuring new vehicles due to soaring inflationary pressures and prolonged waiting periods, mainly in the PV segment, is favorably impacting the replacement division.
One of the factors contributing to this growth is the Original Equipment Manufacturers (OEMs), who have incrementally increased prices across various sectors over the past two to three years. These price hikes are a response to regulatory norms’ changes and cost inflation.
Additionally, the dearth of semiconductors and supply-chain hindrances has resulted in longer lead times for vehicle purchases. Coupled with the escalation of vehicle prices, this has led to postponed purchases and necessitated replacements as and when required.
Shamsher Dewan, the Senior Vice President and Group Head for Corporate Ratings at Icra, made a statement regarding the current state of affairs. According to him, the escalation of replacement demand has been caused by the increase in vehicle prices and extended waiting times. He also emphasized the significance of replacing older vehicles when necessary, ensuring that people and goods can continue to move around.
The credit ratings agency has released a report indicating that the proportion of Medium & Heavy Commercial Vehicles (M&HCV) over 10 years old has significantly increased, accounting for almost half of the M&HCV population in the first half of FY23. Similarly, Light Commercial Vehicles (LCVs) older than five years now represent almost two-thirds of the LCV population.
Furthermore, the increasing age of vehicles on the road and the rise in the demand for vehicle parts augur well for the replacement demand of auto components. The demand for used cars has also remained strong, supported by the growth of organized players, longer waiting times for new cars, and improving financing penetration.
Additionally, the decline in imports and the growth in the proportion of branded parts, deeper penetration in rural and semi-urban areas, and other factors are likely to boost replacement demand over the medium term.
According to the credit ratings agency, the adoption of electric vehicles (EVs) is expected to reduce maintenance requirements significantly, as EVs have far fewer parts than traditional internal combustion engine (ICE) vehicles. This, in turn, may impact the sale of engine and transmission products.
However, while the eligibility of older vehicles for scrappage remains high, actual scrappage rates are likely to be lower, as older trucks are generally used for short-haul operations in hinterlands by operators and are unlikely to be replaced.