Auto sector outlook remains stable to negative: India Ratings

Ratings agency India Ratings on Thursday maintained a stable to negative outlook on the automobile sector for 2014-15 financial year.

The agency expects at base case a 3-8 per cent decline in the passenger vehicle segment which comprises cars, utility and multi-purpose vehicles, while the volume growth in the commercial vehicle (CV) segment is likely to post a 6-9 per cent y-o-y decline in domestic volumes in FY15, India Ratings said in its auto outlook released.

India Ratings also said that given the structural issues of over-capacity and intensifying competition it does not envisage the outlook being revised to positive even in the event of a modest volume revival.

"However, curtailment or postponement of planned capacity addition coupled with sales volumes at levels observed in FY11-FY12 could positively impact the credit profile of the sector and result in a stable outlook," it said.

According to the outlook, the financial profile of most industry players is strong despite all segments displaying a y-o-y decline in sales volumes during April-December last year.

The agency had revised the sector outlook in July last year to stable to negative from stable.

Observing that the low leverage (net adjusted debt/EBITDA) of most OEMs provides them the financial flexibility to sustain the on-going economic downturn, the report said, "However, OEMs with limited product and geographic diversification could face further credit profile weakening."

Robust agricultural output translating into meaningful rural demand as well as exports is likely to cushion industry volumes, the report said, adding PV exports, in particular, partially offset the significant decline in domestic volumes in FY13.

Exports ranged from 17-20 per cent of the PV industry sales volumes in the past five years, it added.

According to outlook, the utility vehicles which clocked a 51 per cent y-o-y growth in domestic volumes in FY13, will register a 2-4 per cent decline in growth in FY15 (base case) following an expected 4.6 per cent y-o-y decline in the current fiscal.

Expecting deferment of purchases of new vehicles at least till the first half of the next fiscal by truck fleet operators due to mismatch in freight and diesel price hikes, India Ratings said it believes a high single digit positive growth rate will be possible in H2 FY15 in the CV segment on account of a likely improvement in the industrial activity during that period.

In an optimistic scenario, where political certainty post the 2014 general elections results in a significant revival of economic activity, growth rates in the CV and PV segments could improve to around 1-4 per cent and 2-4 per cent respectively, the report said.

On the capacity utilisation and expansion, the agency estimates a capacity addition of 1.6 million units and 0.2 million units over FY14-FY15 in the PV and CV segments, respectively.

This is likely to result in capacity utilisation declining to 45-47 per cent for PVs in the next fiscal for from estimated 54 per cent in FY 14.
Similarly, for CVs it may fall to 35 -37 per cent in FY 15 from estimated 40 per cent in the current fiscal, India Ratings said.