Credit rating agency Icra said demand for passenger vehicles and tractors have almost reached pre-Covid levels.

In the commercial vehicle segment, medium and heavy commercial vehicles (M&HCV), which were most impacted by the pandemic, is showing signs of recovery. Icra expects passenger vehicles, two-wheelers and commercial vehicles to report healthy double-digit growth in 2021-22.

On the near to medium-term trends, Ashish Modani, sector head and vice-president-corporate ratings, Icra, said, “We expect the industry to witness 20-23 per cent revenue growth during FY22, supported by recovery in the domestic automobile industry and robust exports.

Revenue growth

The passthrough of increase in commodity prices will also add to the revenue growth. The industry gross margins improved sequentially in Q1 of FY22, but remained lower than the historical trend. The shortage of semi-conductors and increase in commodity prices remain the key challenges for the industry in the near term.”

One of the concerns for the industry is the prices of key commodities, which continue to remain high, despite some moderation in recent months.

Auto component suppliers usually pass on the impact of commodity price increases to OEMs with a lag of one to two quarters.

The recent trend also suggests that auto component suppliers have gradually passed on the hike in commodity prices to their customers as reflected in the sequential improvement in their gross margin.

However, the gross margin remains lower than the normal levels (prevalent in FY20) by 100 basis points. Further, given the average inventory holding period of 30-45 days, some companies would have also had the benefit of lower priced inventory.