Key Points

The rating agency estimates that the tariff-related impact could erode operating profits by Rs2,700-4,500 crore, equivalent to 10-15 per cent of the operating profits of auto component exporters and 3-6 per cent of the overall industry's operating profits.

ICRA projects that revenue growth for the Indian auto component sector, represented by a sample of 46 key players with combined annual revenues of over Rs3 lakh crore in FY2024, could moderate to 6-8 per cent in FY2026, down from the earlier forecast of 8-10 per cent.

This downgrade is largely attributed to a potential mid- to high-single-digit decline in exports to the US, following a sharp escalation in import tariffs.

Operating margins for the industry are expected to soften by 50-100 basis points (bps) to 10.5-11.5 per cent in FY2026, while the impact on exporters could be even sharper, with a projected margin contraction of 150-250 bps.

Despite these pressures, ICRA maintains that debt metrics and liquidity are likely to remain comfortable for most exporters in its sample, although margins could decline and working capital requirements may rise.

Shamsher Dewan, Senior Vice President and Head - Corporate Ratings Group, ICRA Limited, "While the auto component suppliers with whom ICRA has interacted indicate that most of the incremental costs would be passed on, however, as in any buyer-supplier negotiation, the extent of pass-through would depend on the supplier's criticality, share of business, competition, and technological intensity of the components supplied."

However, Dewan cautioned that rising economic uncertainty, declining vehicle sales volumes, and tepid replacement demand in the US pose additional risks, alongside intensifying competition in other export geographies such as Europe and Asia.

Roughly 65 per cent of India's auto component export basket is estimated to be affected by the new tariffs. Although a reciprocal tariff by India was temporarily paused for 90 days, an ad valorem duty of 10 per cent remains applicable.

Despite the short-term challenges, ICRA believes India could benefit in the medium term if its cost competitiveness improves relative to China, particularly as global OEMs reassess their sourcing strategies.

Some Indian players have already reported increased inquiries from US importers in recent weeks, indicating potential future opportunities.

- ANI