US Sanctions on RUSAL Put Indian Auto Industry on Crossfire, Says ICRA

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

Ashish Modani, assistant vice president, corporate sector ratings, ICRA, said that generally, auto suppliers have an 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, the automobile industry is grappling with commodity prices pressure over last one year, and this sharp increase in aluminum prices in recent weeks will further dent their operating profitability.

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

Going by the ICRA study, industry-wide credit trends is expected 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. If one considers 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 is likely to be relatively higher than the underlying growth in the automotive industry in the medium to long-term.

Modani added that the revenue growth of auto ancillaries is expected to be at 11-13 percent for FY2019, given healthy growth expected across key automotive sub-segments as well as commodity price impact on realization. We maintain our 10-12 percent long-term (5-year) CAGR expectation for Indian auto supplier industry.