Fitch assigns stable outlook for Indian auto industry in 2012

Ratings agency Fitch has assigned a stable outlook for the Indian auto industry in 2012, driven by the expectation that the credit metrics of most companies, though may weaken, will continue to be in line with values expected during a cyclical downturn. The rating agency said passenger vehicles volumes are expected to grow by 3-5% during the year, with car sales increasing by up to 4%. It, however, said that commercial vehicles (CVs) segment is likely to register a higher volume growth of 8-10%.

In its report - 'Outlook 2012: India Auto' the agency expects passenger vehicles (PVs) to register volume growth of 3-5% in 2012, contributed by growth of 2-4% in cars, 6-8% in utility vehicles and 8-10% in multi-purpose vehicles. As per the report, the sales volumes of cars will be mainly driven by growth in sales of diesel cars credited to the increased demand from 2011, which saw sales reduced due to demand-supply mismatches.

The agency said the auto sector will remain stable even as competition-led pricing pressure amid muted sales will lead to a drop in operating profitability and a subsequent weakening of coverage and leverage indicators. It further believes that a weakening of household finances and higher cost of ownership will continue to restrain the buying power of consumers in 2012, especially buyers of cars in small and mid-size segments, which contribute to the volume of PV sales. Moreover any reduction in interest rates this year is unlikely to boost auto sales significantly given negative sentiments of buyers with regard to general economic conditions, which is slowing on the back of high inflation.

For the CVs segment, Fitch said it is likely to record overall volume growth of 8-10% in 2012, driven largely by the sales of light commercial vehicles (LCVs). This high volume will come as CVs are more reliant on consumer non-discretionary activities and less on industrial activity. On the other hand, a continuation of the high interest rate environment or a downward revision in economic activity would also significantly affect the credit performance of companies, especially the Original Equipment Manufacturers (OEMs) in the medium and heavy commercial vehicle (MHCV) segment.

However, Fitch warned that structural changes in the Indian auto industry in terms of increased number of companies is likely to restrict any significant improvement in margins from current levels, even during future economic upturns. Further, price-based competition amid sluggish sales is expected to reduce industry operating margins by 250-300 basis points in 2012. It also said though credit profile of most companies would weaken in 2012, they would still be within a range commensurate with current rating levels.