AUTO Sector Outlook Revised Down After Six Years - India Ratings

Mumbai, July 10, 2013: India Ratings & Research (Ind-Ra) has revised its outlook for the automobile industry to stable to negative from stable.  This is the first time in six years that the agency has revised its outlook for the sector.

The outlook reflects the structural weakness in the passenger vehicle (PV) segment in terms of high capacity additions and intensifying competition which may potentially become entrenched in the industry structure. The agency expects the segment production capacity to increase to 6.5-6.7 million units by FY16, up 33%-37% from FY13E. This, amid weakening drivers of demand, does not portend well for such capital intensive sector.

Ind-Ra expects margins of PVs to be under pressure due to enhanced competitive intensity, even if the demand recovers (unlikely though) FY14 onwards. The need to continuously invest in model upgrades and new model introductions in PVs also drains cash flows. This added expense is an impediment to improvement in the credit profiles of PV companies, particularly domestic original equipment manufacturers (OEMs).

Ind-Ra expects domestic PV volumes to fall by 5%-12% in FY14, led by the likely yoy decline in car volumes of 8%-15%. The agency believes the reduced demand for PVs is part of the overall slowdown in consumer discretionary spending. This is driven by consistently weak household finances and high cost of ownership on account of high fuel prices and interest rates.  

Sales of utility vehicles (UVs), the driver of PV sales in FY13, have slowed down from April 2013, following an increase in excise duty to 30% from 27% in March 2013. Price conscious buyers opting for UVs in the sub INR0.7m price range (which accounts for significant proportion of segment volumes) appear to be deferring purchases as they are also faced with steadily increasing diesel prices.

Ind-Ra believes overall CV volumes will decline by 6%-12% yoy in FY14. This is because while the recent slowdown in LCV sales appears to be directly impacted by reduced domestic consumption patterns, MHCV sales continue to be weighed down by low demand from infrastructure, mining and manufacturing sectors.  

Ind-Ra does not envisage a revision in the auto outlook to positive in the medium term even if there is modest revival in volumes. However, higher-than-expected agricultural output, and an improvement is export volume may cushion the possible weakening in the financial profiles of OEMs in 2013. Additionally, curtailment or postponement of planned capacity addition would provide some stability to the industry.

Further deterioration in household balance sheets or low industrial activity for the next 12 to 18 months will affect the credit profiles of OEMs severely. In the event of any external shock, affecting the domestic economy, the deterioration may be sooner than 12 months.

(Source: Manager – Corporate Communications and Investor Relations, India Ratings & Research -A Fitch Group Company.)