Fitch Group company India Ratings & Research expects total domestic passenger vehicle volumes in 2013 are only likely to grow 8-9 percent year-on-year, with utility vehicles accelerating at around 30-35 percent. But car and van sales, which have been hit by expensive loans and increasing fuel prices, will grow just 2-3 percent.
The ratings agency expects overall CV volumes to grow 10-11 percent in 2013, led by LCVs, which are expected to clock 13-15 percent year-on-year growth. However, it feels that unless there is a pickup in the overall industrial activity and infrastructure development, apart from government reforms push, medium and heavy vehicle sales, which have been among the worst hit in the last one year, will decline further this year.
"A continuation of industrial activity at the current level is likely to lead to negative growth of 6-9 percent in MHCV domestic volumes. However, policies conducive to capital investment could possibly drive MHCV sales volumes up by 3-4 percent in 2013 (base case)," said Deep Mukherjee, director - corporates and Sudarshan Shreenivas, associate director - corporates.
The muted demand coupled with a capacity overhang in passenger vehicles and intense competition will hurt industry operating margins, on average by around 50-100 bps for CVs and by 150-200 bps for PVs, they said.
Despite the sluggish demand, companies will continue to invest in building new capacities to protect and grow market share and or build a large production base for exports. Indian Ratings expects production capacity in PVs will grow by 15 percent in 2013, However, Mukherjee and Shreenivas feel signs of over capacity are building up in the PV sector, which will further add pressure on margins.
STABLE RATING OUTLOOK
Despite the pressure on volumes and margins, India Ratings says the credit outlook for the auto companies remains stable due to their low leverage. Their median gross debt/EBITDA is well below 1 and so their "credit profiles are unlikely to be structurally impaired," point out Mukherjee and Shreenivas. However, they warn that given the current scenario, chances of revising the outlook to positive are highly unlikely.
In fact, the two analysts say a continuation of the high interest environment or a downward revision in economic activity would significantly affect the credit metrics of auto companies, particularly the M&HCV makers. Volume growth for UVs and passenger cars could also take a hit if diesel prices rise sharply, they added.
Meanwhile, the credit ratings outlook on Indian automotive suppliers too remains stable, but here too India Ratings expects demand to remain moderate this year due to continued slow economic growth and weak signs of recovery in export markets.
"The exports competitiveness of automotive suppliers, arising out of the weak Rupee, could only slightly benefit them as global automotive sales would remain weak in the near term. A further weakening of the Rupee could impact auto suppliers' profitability as cost increases for imported components may be only partially compensated by OEMs and with a lag," said Pragya Bansal of India Ratings.