Indian Auto Component Industry: Revenue Growth Expected, Challenges Ahead

The Indian auto component industry is on track for steady growth, with expectations for a revenue increase of 8-10% in the financial year 2025-26, according to a recent report by rating agency ICRA. However, the industry’s revenue growth will slow down to 7-9% in the current financial year 2024-25, down from the impressive 14% growth seen in 2023-24.

Slower Growth in 2024-25

While the 2024-25 financial year is expected to show slower growth, the long-term outlook remains positive. Operating margins for the industry are projected to stabilize at 11-12% in both 2024-25 and 2025-26. This steady performance is expected to be supported by factors such as operating leverage, higher content per vehicle, and greater value addition.

However, the industry faces challenges, particularly in terms of rising ocean freight rates. The disruption along the Red Sea route has led to a surge in ocean freight costs, which have increased by 2-3 times compared to the previous year. If these higher rates continue, they could put pressure on margins for auto component suppliers that rely heavily on exports or imports.

Major Investments and Technological Advancements

Despite these challenges, the auto component industry is expected to see significant investments. ICRA estimates that the sector will incur a capital expenditure (capex) of Rs 25,000-30,000 crore in 2025-26. These funds will be allocated towards capacity expansion, localization efforts, and technological advancements, including developments related to electric vehicles (EVs). However, it is worth noting that the EV supply chain is still only 30-40% localized, with major components like battery cells still entirely imported.

The relatively low level of localization in critical EV components presents significant opportunities for domestic auto component suppliers. As localization increases, Indian manufacturers are likely to play a larger role in the global automotive supply chain.

Growth in Domestic Demand

The domestic market continues to be a major driver for the auto component industry. Demand from original equipment manufacturers (OEMs) in India is expected to grow by 7-9% in 2024-25 and 8-10% in 2025-26. This growth will be driven by the premiumization of components and increased value addition. Furthermore, the demand for replacement parts is expected to rise by 5-7% in 2024-25 and 7-9% in 2025-26. Factors contributing to this growth include an increase in the vehicle parc (the total number of vehicles on the road), the aging of vehicles, a rise in used car purchases, and a growing trend of preventive maintenance.

Export Opportunities

ICRA highlights that the closure of plants in the European Union (EU) due to viability concerns could create new export opportunities for Indian auto component suppliers. Specifically, there is expected growth in metal castings and forgings. The increasing age of vehicles and the sale of more used vehicles in global markets will also drive export demand in the replacement segment.

However, one potential risk to the export market is the impact of import tariffs. ICRA cautions that any future tariffs on Indian auto component exports could affect the industry’s global competitiveness and growth prospects.

A Transitional Phase for the Industry

Vinutaa S, Vice President and Sector Head of Corporate Ratings at ICRA, noted that the domestic auto component industry is currently in a transitional phase. Automotive players are increasingly focusing on sustainability, innovation, and global competitiveness. The shift toward electric vehicles and the rise in demand for more advanced, higher-quality components are key factors driving this change.

Conclusion

Despite facing challenges such as rising freight costs and low localization in the EV supply chain, the Indian auto component industry is poised for growth. With increased demand in both domestic and export markets, along with significant investments in technological advancements, the sector is well-positioned for a prosperous future. As manufacturers focus on innovation and sustainability, the industry is likely to continue evolving, presenting new opportunities for players both in India and abroad.