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Auto outlook negative, says India Ratings first time in 6 yrs

Auto outlook negative, says India Ratings first time in 6 yrs

India Ratings said outlook for the auto industry looks negative and it does not envisage upward revision in the forecast in the medium term even if there is modest sales revival.

India Ratings on Wednesday said outlook for the auto industry looks negative and it does not envisage upward revision in the forecast in the medium term even if there is modest sales revival.

This is the first time in the six years that the agency has revised its outlook for the sector.

"The outlook reflects the structural weakness in the passenger vehicle segment in terms of high capacity additions and intensifying competition which may potentially become entrenched in the industry structure," India Ratings said in a report.

However, higher-than-expected agricultural output and improvement in export volume may cushion the possible weakening in the financial profiles of original equipment manufactures this year, the report said, adding that curtailing or delaying planned capacity addition will provide some stability.

The auto segment production capacity is expected to increase to 6.5-6.7 million units by FY16, up 33-37 per cent from the estimated numbers of the previous fiscal, the agency said. This does not augur well for such capital intensive sector amid weakening drivers of demand, it added.

The report notes that utility vehicles sales, which pushed the volumes of the over-all passenger vehicles last fiscal, have slowed down from April due to the 3 per cent excise duty imposed in the Budget.

"Price-conscious buyers opting for the utility vehicles in the sub-Rs 7 lakh price range, which accounts for significant proportion of segment volumes, appear to be deferring purchases as they are also faced with steadily increasing diesel prices," the report observed.

According to the agency forecast, domestic passenger vehicle volumes are expected to decline by 5-12 per cent in the current fiscal, led by the likely year-on-year decline in car volumes of 8-15 per cent.

Reduced demand for passenger vehicles is on account of overall slowdown in consumer discretionary spending due to consistently weak household finances and high cost of ownership amid high fuel prices and interest rates, India Ratings said.

The agency expects PV margins to be under pressure due to enhanced competitive intensity, even if the demand recovers, if at all, in the on-going fiscal.

The need to continuously invest in model upgrades and new model introductions in PVs also drains cash flows, it said. "This added expense is an impediment to improvement in the credit profiles of PV companies, particularly domestic original equipment manufacturers," it added.

The agency also expects that overall commercial vehicles volumes will decline by 6-12 per cent year-on-year this fiscal.

"This is because while the recent slowdown in light commercial vehicle sales appears to be directly impacted by reduced domestic consumption patterns, medium and heavy commercial sales continue to be weighed down by low demand from infrastructure, mining and manufacturing sectors," the report said.

Further deterioration in household balance sheets or low industrial activity for the next 12-to-18 months will affect the credit profiles of OEMs severely, it said. In the event of any external shock, affecting the domestic economy, the deterioration may be sooner than 12 months, the report added.