The auto component industry currently faces two key risks – Import tariffs and supply constraints of rare earth magnets (REM). On tariffs, auto component suppliers indicate that a majority of the incremental costs have been passed on. Yet, ICRA notes that export earnings have suffered, not because of the pricing pressures, but because of the weakness in automobile sales volumes in the US. The recent GST rationalisation measures are a structural positive for automotive demand and the auto component sector.

Demand for auto components is driven by domestic original equipment manufacturers (OEMs), replacement market and export markets. Domestic OEM revenues for auto ancillaries are likely to grow at 8-10% in FY2026. Increase in vehicle parc (all automotive vehicles in use at any given time), higher average age of vehicles/used car purchases, preventive maintenance and growth in organised spares, among other reasons, are likely to aid replacement market revenue growth of 9-11% in FY2026. The GST rationalisation is also expected to improve affordability and support demand for both OE and replacements.

ICRA expects the revenue growth of the Indian auto component industry to ease to 7-9% in FY2026 against 10% in FY2025, if there is mid-to-high, single-digit revenue decline in exports to the US, stemming from the tariff-related impact. Operating profit margins are likely to moderate by 50-100 bps to 10.5-11.5% in FY2026, given that a part of the incremental costs due to tariffs would be borne by Indian auto-component exporters. Nevertheless, the situation is evolving as tariff actions have been fluid and trade negotiations are ongoing. New vehicle registrations in Europe and the US are estimated to remain tepid in CY2025, impacted by the economic challenges and geopolitical tensions.