Record Sales, Rising Working Capital Pressure: What’s Changed for Auto Component Working Capital
In July we looked at six cash flow traps in India’s auto component supply chain, and at what the new TReDS rules changed for them. Three months on, the industry’s sales picture has got better and its cash picture has got harder. Here is what moved between July and October, and what it means for suppliers heading into the second half of the year.
Demand hit a record, and that costs cash
Domestic vehicle sales reached 83.88 lakh units in July to September 2026, up 18.2% on the year and the highest second quarter on record, according to SIAM. Passenger vehicles grew 30.7% and commercial vehicles 28.7%. SIAM put this down to lower GST rates, steady rural and urban demand, freight activity and a replacement cycle.
For a supplier on those platforms, a jump in schedules shows up as cash going out first. More raw material, more work in progress and more receivables all have to be funded before the first payment on the extra volume arrives. With gross current assets often running at 110 to 140 days for mid-sized component makers, a 30% rise in volume needs a large rise in working capital to go with it.
This pressure often shows up as a busier cash credit line rather than a loss, which is why it can go unnoticed in a good quarter.
Margins are under pressure, and cost recovery lags
In June, Crisil Ratings said it expects auto component operating margins to fall by 100 to 150 basis points this fiscal, to 10.5 to 11%, as the West Asia conflict pushes up input and freight costs. Raw materials make up nearly three-quarters of the sector’s costs, and steel and aluminium alone account for 50 to 60% of inputs.
OEMs usually allow suppliers to pass on cost increases, but Crisil notes this happens with a lag of one to two quarters and not always in full. In October, Motilal Oswal said it expects auto sector margins to recover gradually after the second quarter as price increases come through.
A margin that recovers on paper doesn’t put the cash back straight away. Suppliers pay for steel at today’s price and collect the revised price only when the OEM pays the invoice that carries it. Between those two dates, the cost increase sits on the supplier’s balance sheet.
Inventory is going up, by design
Crisil expects manufacturers to build buffer stocks against supply disruption, which could raise inventory by 15 to 20 days from the current 80 to 85 days. It also notes that the ability to stretch payments to suppliers to absorb this varies, with larger companies better placed.
For a supplier with ₹100 crore in annual sales, 15 extra days of stock ties up roughly ₹4 crore. Holding a buffer is a reasonable response to the past 18 months, which included China’s restrictions on rare earth magnet exports and the West Asia conflict. The question is where it is held. A buffer applied to every part number uses far more cash than one focused on imported, single-source or export-controlled items.
TReDS doesn’t finance inventory. What it can do is take receivables off the working capital line, which leaves more of that line available for stock.
The MSMED (Amendment) Act: what’s in force and what isn’t
Parliament passed the MSMED (Amendment) Act, 2026 in August. The Ministry of MSME then brought it into force in stages through notification S.O. 5575(E) dated 12 October 2026.
In force from 15 October 2026 (sections 2 to 7, 11 and 13 to 17):
- TReDS settlement for CPSEs is now in the Act. New section 15A requires central public sector enterprises to settle MSME invoices through TReDS and disclose them. Until now this rested on a ministry notification of 30 June. Section 15A also allows the Centre and states to extend the requirement to other buyers, according to Transclew’s reading of the commenced sections.
- MSME classification by investment and turnover, a free national registration platform, and more facilitation councils.
- A warning for a first failure by buyers to report unpaid dues to micro and small suppliers, with penalties for repeat failures.
From 15 December 2026: section 12, which changes how facilitation councils are made up.
Not yet in force (sections 8 to 10, no date given): the delayed-payment dispute changes. These include 90-day limits for mediation and awards, a 30-day window to move a failed mediation to arbitration, a 75% deposit before a buyer can challenge an award, and recovery of awards as arrears of land revenue. TaxGuru confirms these sections are still waiting to be notified.
For a Tier-1, this means the statutory payment timelines and the 43B(h) tax rule apply as before, while the faster dispute process that suppliers were promised isn’t available yet. As of 14 August 2026, MSME Samadhaan showed ₹20,979 crore in delayed-payment claims still pending.
Also Read: The Missing Layer: How Credit Guarantee on TReDS Opens Up MSE-to-MSE Trade
Exports: the promised tariff relief hasn’t arrived
Indian auto parts entering the US still face the 25% Section 232 tariff. The India–US interim trade framework of February 2026 promised India a preferential tariff-rate quota for auto parts, but no proclamation putting it into effect had been issued as of October 2026.
There has been one improvement since July. The US finalised its Section 301 forced labour measures on 23 July, setting India’s rate at 10%, down from the 12.5% proposed in June. According to the Ministry of Commerce, products already covered by Section 232, including auto parts, are not subject to this additional duty.
A second Section 301 investigation, into excess manufacturing capacity, covers 16 economies including India and sectors including automobiles. No tariff decision had been announced as of late September. Until it is resolved, US buyers have less reason to commit to new multi-year programmes with Indian suppliers.
Shipping times are the other drag. Crisil notes that longer routes caused by the West Asia conflict have increased delivery lead times, which keeps export receivables outstanding for longer.
TReDS, four months into the CPSE mandate
The CPSE requirement has now moved from a notification into the Act through section 15A, which makes it harder to reverse and opens the door to extending it beyond public sector buyers. The detailed rules on how invoices are routed through TReDS had not been published as of mid-October. CPSE-level adoption data hasn’t been released either, though the ministry told Parliament in July that there had been “considerable traction” in onboarding suppliers.
For the wider market, invoice discounting on TReDS reached ₹3.47 lakh crore in FY26, up from ₹40,000 crore in FY22, according to the Ministry of MSME.
On DTX, CGTMSE credit guarantee cover went live in September 2026. This is one of the Budget measures we covered in July, now in operation. It gives financiers guarantee cover on eligible invoices, which can bring more bids on invoices from smaller or unrated buyers.
What to check before 31 March
For FY27, the year-end is when several of these pressures turn into numbers in the accounts. Under Section 43B(h), now section 37(2)(g) of the Income-tax Act, 2025, any amount owed to a registered micro or small supplier beyond the agreed period, capped at 45 days, is not deductible until the year it is actually paid. Dues outstanding beyond that limit on 31 March become a tax cost for the year.
Five checks are worth doing in the next quarter:
- Supplier payable days against the 45-day limit, split between micro and small suppliers, who are covered, and medium suppliers, who aren’t.
- Whether the vendor master records MSME status correctly. The 43B(h) rule depends on it, and the new reporting obligation now carries a warning and penalties.
- Where the extra inventory is, and whether it sits in the parts that are actually at risk.
- How much of the recent cost increase has been recovered from OEMs in cash, not just agreed in price revisions.
- Whether invoices from your micro and small suppliers could move to TReDS, so they get paid early without your payable days changing.
None of these needs a new strategy. Each needs a number, and most finance teams can find all five before the end of the quarter.