Debt, liquidity of auto parts exporters to stay comfortable despite US tariff hikes: Report

Debt metrics and liquidity are likely to remain comfortable for most auto component exporters despite potential decline in margins and increase in working capital requirements in the wake of the US tariff hikes that have been announced by President Donald Trump, according to an ICRA report released on Monday.

The Indian auto component industry demand continues to benefit from a diversified mix of end-user segments and geographies, with over 70 per cent of its revenues coming from domestic sales. The US constituted only 8 per cent of the overall industry revenues in FY2024, the report states.

Export of auto components to the US grew at a Compounded Annual Growth Rate (CAGR) of 15 per cent during FY2020-FY2024.

Factors like rising supplies to new platforms because of vendor diversification by global original equipment manufacturers, higher value addition, and favourable Forex movement, among others, have benefited Indian auto component manufacturers, despite muted new vehicle registration growth in the US vis-a-vis pre-Covid levels, according to the report.

Shamsher Dewan, senior vice president at ICRA Limited, said: "The auto component suppliers 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.”

“If an average 30-50 per cent of the incremental tariff costs are to be absorbed by the Indian auto component exporters, we estimate an earnings impact of roughly Rs. 2,700-4,500 crore, which is 3-6 per cent of the operating profits of the auto component industry and 10-15 per cent of the operating profits of the auto component exporters,” he added.

Select entities have manufacturing facilities in the US and supplies from those units would be shielded from the cost impact of the tariff.

"Nevertheless, given the increased economic uncertainty, decline of automobile sales volumes and tepidness in the replacement market in the US remain the key downside risks. Pricing pressures can also arise in other export geographies such as Europe and Asia where Chinese competition would likely increase,” he said.

A 25 per cent tariff was imposed on imported key automobile parts (engine, transmission, powertrain, and electrical components) vide an order dated March 26, 2025 effective not later than May 3, 2025. About 65 per cent of India’s auto component export basket is estimated to fall under the 25 per cent import tariff category.

ICRA believes that loss of business share with customers is unlikely in the near term as switching costs are high and product development, testing, and approval cycles are reasonably long.

Further, there could be incremental opportunities for India arising from cost competitiveness vis-a-vis Chinese components (if the same level of tariff continues), albeit over the medium term. Some players have indicated additional enquiries from US importers in the last few weeks.