Ratings agency Fitch today assigned a stable outlook for the Indian auto industry in 2012 and 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%.
"The 2012 outlook for the Indian auto industry is stable, 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," Fitch Ratings said in its 'Outlook 2012: India Auto' report.
It further said: "Fitch 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."
According to the report, the sales volumes of cars will be driven by growth in sales of diesel cars attributed to the pent up demand from 2011 which saw sales curtailed due to demand supply mismatches.
It 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 consequent weakening of coverage and leverage indicators.
"Fitch believes that a weakening of household finances and higher cost of ownership will continue to curtail the buying power of consumers in 2012, especially buyers of cars in small- to mid-size segments which contribute to the bulk 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," it said.
Regarding the commercial vehicles (CVs) segment, Ficth said it is likely to register 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 dependent on consumer non-discretionary activities and less on industrial activity.
"Fitch expects LCVs to continue displaying strong volume growth of 18-20% in 2012. However, medium and heavy CVs are likely to display muted volume growth of at 3-5%, considering that they are deployed to a greater extent for industrial and mining-related transportation activities," the report said.
The agency, however, 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.
"Fitch expects the competitive landscape in 2012 to intensify, with subsidiaries of foreign auto manufacturers increasingly focusing on the Indian market as their exports to developed countries are likely to be significantly affected during the year.
"Price-based competition amid sluggish sales is expected to reduce industry operating margins by 250-300 basis points in 2012," the report said.
According to Fitch, industry leverage of the auto sector will increase in 2012 due to committed capex plans as well as due to the need to support the working capital requirements of the value chain.
However, 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.
India Inc has complained that the high interest rates, resulting from 13 hikes announced by the Reserve Bank between March, 2010 and November, 2011 leading to increase in the cost of borrowings, has hindered fresh investments and led to industrial slowdown.
"In the case of PVs, the volume growth rate for 2012 may be negative if consumer purchasing power is further weakened due to continued high consumer inflation coupled with a less-than-commensurate rise in income levels," the report said.
It said that although credit profile of most companies would weaken in 2012, they would still be within a range commensurate with current rating levels.
