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MOTORINDIA
l
March 2012
95
Stableoutlookfor
automotive suppliers
Fitch Ratings maintains a stable
outlook for the Indian auto supplier
sector for 2012 on the expectation of
largely stable credit profiles despite
moderation in revenue growth. Ex-
posure to different segments of the
domestic automotive industry will
help insulate diversified auto sup-
pliers’ operating cash flows from a
sustained contraction in automotive
sales in 2012. However, smaller
players catering to limited products/
market segments are likely to be
more affected until the macro-eco-
nomic situation improves.
Growing demand for localised
components by original equipment
manufacturers (OEMs) in India, in
an attempt to curtail raw material
costs and diversify the geographical
spread of suppliers, augurs well for
domestic auto suppliers during the
year. Though domestic sales vol-
umes are likely to remain subdued,
particularly for passenger vehicles
(PVs), growth for the suppliers
could come from an enhanced prod-
uct portfolio.
The current depreciation of the
Indian rupee is likely to benefit auto
suppliers in two ways: by increasing
cost competitiveness of exports and
by prompting OEMs to source com-
ponents locally amid the rising cost
of imports. India is a net importer
of auto components. This presents
a significant opportunity for domes-
tic auto suppliers. While demand is
likely to remain subdued in devel-
oped markets such as Europe, rupee
depreciation has enhanced India’s
export competitiveness.
Bilateral or regional trade agree-
ments could potentially change the
international trade flows over medi-
um to long term. The EU-Korea free
trade agreement (FTA) which came
into force in July 2011 could hurt
the Indian auto suppliers’ exports
to Europe which are already under
pressure. Besides, a large number of
trade agreements that India has / is
negotiating with other economies,
particularly in Asia, would increase
the competition in the domestic in-
dustry over medium term.
Fitch notes that deriving benefit
from increased localisation and ru-
pee depreciation would first involve
undertaking significant capex in
terms of enhancing capacity and
technical capability. The investment
needs for capitalising on the oppor-
tunity seems very large in relation
to the internal cash accruals of most
of the suppliers, prompting the need
for external sources of funds. This
would drive up debt for most of the
suppliers, though some part of this
could also be funded by way of fresh
equity.
Fitch notes that a deeper and more
widespread fall in domestic automo-
tive volumes could hamper domes-
tic automotive suppliers’ operating
cash flows and credit profiles.
A worse than expected liquidity
crunch has the potential to hurt auto
suppliers in several ways, besides
its indirect impact through lower
auto volumes. An increase in the
market outlook
Growing demand for lo-
calised components by
original equipment manu-
facturers (OEMs) in India
augurs well for domestic
auto suppliers during the
year.