The Red Sea crisis is likely to impact the margins of the auto component industry over the next few quarters amid higher container rates and shipping time, credit ratings agency ICRA said on Thursday, projecting a moderate growth for the industry this fiscal.

Close to two-thirds of the auto component exports are made to North America and Europe, and one-third of the imports is made from these regions, as per the ratings agency.

“The disruption along the Red Sea route has resulted in a surge in container rates by 2-3 times in YTD (year-to-date) this calendar year compared to CY2023, while shipping time has also increased by around two weeks,” ICRA said.

The operating margins are set for a year-on-year improvement of around 50 basis-points in FY2025, benefitting from better operating leverage, higher content per vehicle, and value additions, while remaining exposed to any sharp volatility in commodity prices and foreign exchange rates, it said.

Also, the industry’s liquidity position, according to ICRA, remains comfortable, especially across tier-I players supported by stable cash flows and earnings. ICRA said it expects the growth in revenues of the Indian auto component industry to ease to 5-7 per cent this fiscal, from the highs of around 14 per cent in FY 2023-24.

“Demand from domestic original equipment manufacturers (OEM) constitutes over 50 per cent of sales for the Indian auto component industry and the pace of growth in the segment is expected to moderate in FY2025,” said Details, Vinutaa S, Vice President and Sector Head for corporate ratings at ICRA Limited.

The ratings agency said these growth projections are based on the sample of 46 auto ancillaries with aggregate annual revenues of over Rs 3,00,000 crore in FY2024.

The aging of vehicles and increased sales of used vehicles in global markets are also expected to aid in the export of components for the replacement segment in overseas markets, according to the ratings agency.