Weak demand from vehicle manufacturers coupled with a slump in exports has deteriorated the credit quality of auto component manufacturers in the country, a Crisil report stated. The downgrade comes at a time when component suppliers have sought to cut costs and reduce capital spending to cope with pressure. However, these measures are unlikely to yield results quickly enough to offset the impact on credit quality.
Pawan Agrawal, director - corporate and government ratings, Crisil said, “For many auto component suppliers, we see rising pressures on revenues and profitability lengthening working capital cycles and increasing gearing levels. These prospects have led Crisil to lower ratings or revise outlooks downwards on 12 suppliers since October 2008. Further, ratings on 18 of the 56 suppliers that Crisil rates carry ‘negative’ outlooks”. Supplies to original equipment makers (OEMs) account for 60 per cent while the export market accounts for 14 per cent of the component makers’ revenue.
Some key reasons for the declining positions of suppliers is attributed to delayed payments by vehicle manufacturers or OEMs, which include Ashok Leyland and Tata Motors. Many small manufacturing units located in industrial areas such as Adityapur in Jamshedpur and Pimpri-Chinchwad near Pune were forced to shut shop. The impact has been severe on suppliers, who depend on business from commercial vehicles, as the segment has taken a sharp plunge in production lately. Both Ashok Leyland and Tata Motors had severly cut production of commercial vehicles to align it with demand. As a result, component manufacturers could reduce their aggregate annual capital investment by as much as 40 per cent in 2008-09 and 2009-10 from Rs 2,200 crore incurred in 2007-08, said the report.