Despite all the hoopla over an impending boom in the auto components sector -- thanks to the growing trend of outsourcing -- both profit margins and return on capital employed of auto component makers have been on the decline over the past several years.

According to the Industry Watch Series, the Indian Automobile Components Industry report compiled by Icra, "the operating margins of the components industry remained stable during FY1997 and FY1998, but declined thereafter till FY2002". Analysts said the trend was also clear in FY2003.

Icra said the slowdown in the automotive industry during FY1998 and FY1999 led to a decline in volumes and price realisations, which depressed the operating margins of the industry.

In FY2000, despite the higher growth rate reported by the automotive players, the operating margins of the component manufactures declined.

This was because of the increase in material costs following an increase in the price in certain key metals.

For the Indian automotive components industry, material cost as a percentage of total operating income declined in FY1998 but increased thereafter till FY2001 and then declined marginally in FY2002.

The increase during FY1998 and FY201 was partly because of the increase in the prices of certain key metals.

The employee costs increased in FY1998 and FY1999, declined in FY2000 and increased thereafter.

This increase is attributable to the rise in the expenditure on manpower development -- many products require highly skilled manual labour.

Icra said the decline in FY2000 can be attributed to the expansion in the base, that is operating income, as during FY2000 the automotive component companies reported high growth in sales, and thereby a rise in operating income.

However, the cost structure across different segments differs widely.

The engine parts segment, which requires technically skilled labour, has the highest employee costs in comparison with other segments and the industry aggregate.

For some products, the raw material cost is higher than the industry average. At times, this is accounted for by higher import content.

The returns for the automotive components industry declined during the period financial year 1997 to financial year 2002.

The trend has continued in FY 2003, industry analysts add. Icra said the decline in returns during FY1998 and FY1999 was largely on account of the drop in margins and the slowdown in the automotive industry, which led to a fall in capacity utilisation for several component manufacturers.

Some of the players in the automotive components industry had expanded their capacity between FY1995 and FY1997, following the high rate reported by the automotive industry (in FY1995 and FY1997) and anticipating higher demand in the following years.

However, the slowdown in the industry during FY 1998 and FY1999 led to a decline in the capacity utilisation of such players.