US sanctions on RUSAL put Indian automobile industry on crossfire

The sharp increase in aluminium prices will weigh on profitability of auto-component suppliers as well as OEMs in the near term.

Apr 23, 2018 01:04 IST India Infoline News Service

Post US sanctions on RUSAL, one of the leading Aluminium manufacturer globally, Aluminium prices have sky-rocketed by 30% over last two weeks. Automobile industry, one of the key user industry for aluminium will be impacted by the sudden spurt in prices. Aluminium (along with its alloy) accounts for about 10% of the weight of a hatchback and 18-20% in a two-wheeler. The sharp increase in aluminium prices will weigh on profitability of auto-component suppliers as well as OEMs in the near term.

Ashish Modani, Assistant Vice President, Corporate Sector ratings, ICRA said, “Generally, auto suppliers have inbuilt pass-on clause with OEMs which provides adjustment for input price volatility after a lag of 1-3 months; this will impact the profitability of the auto suppliers vulnerable to cost increases in the interim. Already, automobile industry is grappling with commodity prices pressure over last one year, and this sharp increase in aluminium prices in recent weeks will further dent their operating profitability.”

Over the past few years, aluminium content in a vehicle has increased gradually and steadily at the expense of ferrous content. Additionally, Aluminium alloys have good impact absorption capability thereby allowing superior structural capability without increasing overall weight. Aluminium is predominantly used in alloy wheels, radiators, doors and frames and in recent time find increased acceptance in cylinder heads and blocks of 2W and PV.

ICRA expects industry-wide credit trends to remain stable, supported by robust demand from the OEM segment in the near term, supported by healthy cash accruals, gearing as well as coverage indicators for the industry have improved considerably over the past two years. Considering the increasing content per vehicle due to various technological advancement as well as regulatory measures (emission, safety regulations), the growth in the auto component industry will be relatively higher than the underlying growth in the automotive industry in the medium to long term.

Modani adds, “The revenue growth of auto ancillaries is expected to be at 11-13% for FY2019e, given healthy growth expected across key automotive sub-segments as well as commodity price impact on realization. We maintain our 10-12% long term (5 year) CAGR expectation for Indian auto supplier industry.”

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