Prolonged Auto Slowdown to Further Stress Auto Suppliers’ Credit Metrics - India Ratings
cityairnews
Jan 16, 2014 12:00
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New Delhi, January 16, 2014: India Ratings & Research (Ind-Ra) has maintained a stable to negative outlook on automobile suppliers for FY15 on the back of continued weak auto demand growth. This will further weaken the credit profiles of automotive suppliers. The agency revised the outlook to stable to negative from stable in July 2013.
The auto component sector will continue to face subdued demand over the short-to-medium term. Ind-Ra believes production of auto components will grow at a much lower pace of negative 2%-1% yoy in FY15. This can be attributed to an expected 3%-5% decline in production at original equipment manufacturers (OEMs), estimated 4%-6% growth in the replacement market and a 7%-10% increase in exports.
Ind-Ra expects the exports of auto components to increase in FY15 given a pick-up in demand in the overseas market. Also, to better absorb cyclical shocks, auto component manufacturers have been diversifying into related industries such as farm equipment and construction equipment, leveraging their core strengths to cater to related industries with similar technology requirements. In the absence of sufficient cash flow generation visibility, the industry may also be exposed to refinancing risks.
WHAT COULD CHANGE THE OUTLOOK
Sustained Demand Revival: Ind-Ra believes a revision in the outlook to stable could only be brought by a sustained revival in auto demand in FY15. The agency could take positive rating actions on individual companies rather than on the sector as a whole.
Further Deterioration in Credit Metrics: A deeper and more widespread fall in domestic automotive volumes could further hamper domestic automotive suppliers’ operating cash flows and credit profiles. A worse-than-expected liquidity crunch can hurt auto suppliers in several ways besides its indirect impact through lower auto volumes.
(Source: Manager – Corporate Communications and Investor Relations, India Ratings & Research -A Fitch Group Company.)
