The Indian auto component sector that has underperformed over the past several quarters is expected to witness stronger outsourcing trends and robust domestic demand growth in future, an industry analyst said.
"We believe that growth expectations are still justified. However, the long product development cycles inherent to the export market and high capex requirement for expanding capacities has affected the performance of the sector in the recent past. We believe the performance is likely to improve significantly going forward," Edelweiss Securities' analyst Ashutosh Goel said in the company's research report.
Auto component firms with significant investments towards capacity expansions will be in a position to capture this growing demand, he said.
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Goel said, given that a growing part of the domestic auto part story is based on exports, there have been concerns on the impact of rising rupee on margins.
"We believe the industry can absorb a gradual and orderly appreciation of 3-4 per cent in the rupee, without hurting margins, through productivity gains, improving economies of scale, reasonable pricing power, higher value addition through design and engineering services," Goel said.
"Also, given that input costs account for 60 per cent of revenues of component producers, they enjoy a natural hedge to that extent against an appreciating rupee. In fact, the composition of exports has shifted significantly in favour of the Euro, which has been relatively strong against the dollar," he said.
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