Tuesday, January 27, 2009

Fitch Ratings: 2009 Indian automotive sector outlook a special report

Overview The Indian auto sector (passenger cars and commercial vehicles (CVs)) underwent one of the longest and strongest positive cycles to end-September 2008 (Q3CY08), while year-on-year (yoy) sales growth has since decelerated rapidly. In Fitch Ratings 2008 Outlook for the sector, the agency acknowledged the inherent cyclicality of the demand pattern, wherein a three-to fouryear growth spurt was followed by a two-year downturn. However, Fitchs expectation for a sector recovery from H2CY08 has been delayed due to various macroeconomic factors, including tight liquidity and credit availability, slower GDP and industrial production (measured by the index of industrial production (IIP)) growth rates, and depressed investment/consumer sentiment. Fitch remains cautious with regard to the demand outlook for the sector in calendar-year 2009 (CY09), as these key environmental factors are unlikely to improve in the near term. Fitch expects volumes to stabilise over H1CY09, although at lower levels than in CY08. This will result in negative yoy growth rates compared with CY08 until end2009, when the high base effect is corrected. Whilst the long-term fundamentals of the sector remain strong, the reversion to long-term growth rates (around 10%-12% for cars and 8%-10% for CVs) is likely to take longer and be slower than in earlier cycles. The agency expects the industry volume graph over the medium-term to follow more of an Lshaped pattern rather than the U-shaped pattern seen through the earlier positive cycle. Furthermore, exports have been unable to provide the earlier cushion over CY08 due to a severe slowdown in their respective markets. CV decline to continue over the short to medium term Growth rates have traditionally been more volatile for CVs than for cars a trend being indeed witnessed in the current slowdown. Domestic CV sales declined by 9.5% in April-November 2008 compared with the same period in 2007, to 298,208 units. However, the full impact of the deceleration will only be seen in the April-March financial year-end (FYE09) figures, as the yoy declines continue through Q1CY09. Although CV makers have been offering discounts, it has not been enough to offset the current negatives being faced by freight operators a reflection of the current economic environment. Operators have faced pressures over H2CY08 due to the following:

>Pressure on freight volumes due to lower freight demand from exporters, slower growth in IIP,
and competition from railways for large commodities. This, coupled with increased capacity built up over the cycle, has led to lower capacity utilisation.

>Operators have also faced severe cost pressures due to higher fuel and financing costs, putting
further pressure on margins. However, with excess capacity, they have relatively limited ability to pass these costs on to their customers. This is seen in the softer trends in the freight indices. However, the recent softening in interest rates and reduction in fuel costs over H2CY08 could boost operators liquidity, although with a lag effect.

>Operators are also facing issues with regard to the higher cost of credit, and availability of
finance with regard to new truck purchases. The problem is compounded by Fitchs expectation of higher NPL levels across truck financiers, which could further hamper credit availability. Fitch notes that stable CV demand remains contingent upon a stable economic environment, including continued positive growth in freight volumes and stabilisation of freight rates at higher levels. This will likely lead to an improvement in the financial and liquidity position of operators. Demand could also benefit towards end-CY09 from the advancement of purchases in anticipation of the new emission norms in April 2010, although this will be one-time in nature similar to that of the overloading ban two years ago. Fitch expects the above demand drivers to stabilise over CY09, and anticipates a marginal soft recovery to start towards end CY09. Car sales also negative, but not as bad as for CVs Car sales started to decline over H208, primarily due to increased financing costs and lack of credit availability. Domestic car sales remained largely flat at around one million units for the period April-November 2008 compared with the corresponding period in 2007. The extent of decline has been partly mitigated by the number of new model launches, although this has resulted in a re-alignment of market share away from players with aging product portfolios. Car sales have primarily been impacted by the availability and currently high cost of consumer finance, combined with lower visibility of income growth. However, Fitch expects car sales to recover faster than CVs once credit availability is eased. Volumes in CY09 are also likely to be supported by the large number of new launches planned by various players, although this will also increase competitive intensity. Car makers have also been offering incentives and discounts to stem the ongoing slowdown in sales, which have helped mitigate the decline in volumes. Margin pressures across the board The discounts being offered by original equipment manufacturers (OEMs) are likely to have a significant impact on their operating margins over the short term. The current lower capacity utilisations across the sector will also likely magnify the margin impact of overheads. However, companies are implementing stringent cost-cutting measures such as laying off temporary workers and reducing overtime. Although some relief can be expected over the near-term from price cuts from vendors, as well as softer input prices (steel, copper and aluminium), this will benefit OEMs only once the current raw material inventories purchased at higher costs are liquidated. Rising working capital pressures across the sector

Slower demand coupled with lack of financing access by dealers has put pressure on the working capital cycles of most OEMs. Slower demand has led to inventory pileups both at the dealer level and at the OEMs own plants. However, car and CV makers have been taking corrective measures, primarily in the form of cutting back on production to prevent further inventory pileups. But these production cuts have taken place with a lag effect, resulting in stretched working capital cycles for most OEMs and putting further pressure on their liquidity. As production and dispatches continue to lag market demand, Fitch expects the situation to correct itself over the short term. OEMs are stretching their utilisation levels of working capital limits, as well as stretching their suppliers payment terms to finance this liquidity mismatch. Deterioration in credit profiles partly mitigated by deferments in capex Most OEMs are likely to face substantial pressure on operating cash flows due to slower demand, lower margins and higher working capital requirements. This will in turn put pressure on their liquidity and credit metrics over the short to medium term. Interest coverage is likely to remain under pressure due to a combination of higher working capital utilisation, increased interest costs, and Fitchs expectation of negative free cash flow (FCF) for the sector. Fitch notes that the impact on credit profiles has been more severe for pure-play CV makers, which have faced the brunt of the impact of the slowdown. Whilst most OEMs are currently implementing large-scale expansion, some of the greenfield projects are being scaled down/deferred, which could stem the extent of deterioration. That said, a substantial part of their expansion is nondiscretionary in nature, eg critical capex required for new model launches, and long-term strategic initiatives. Thus, whilst the extent of capex will remain large in relation to operating cash flows, the size of these investments is likely to be lower than that projected by Fitch in CY08. The agency expects the lower growth to translate into higher negative FCF in FY10 than anticipated earlier, which will exert additional pressure on operating metrics. Negative outlook over the short to medium term; Long term fundamentals remain A recovery of the sector remains contingent upon improved credit availability as well as recovery of key demand drivers including GDP growth and the freight markets. The government has set out a stimulus package for the sector, which includes better credit availability for CV financiers, increased deprecation benefits for CV purchases, and a reduction in excise duties (which have already been passed on). In addition, bus sales could also benefit from the proposed assistance to be given to state governments under the Jawaharlal Nehru National Urban Renewal Mission. While this will, to an extent, help stem the current volume decline, Fitch believes that a recovery in freight rates will remain more critical for the CV sector, which is likely only over the medium term. Better credit availability will, however, partly offset the current impact of the slowdown for both cars and CVs.

Automobile sector slowdown to continue until 2009-10: CRISIL

October 01, 2008

Difficult financing conditions and rising cost of ownership have caused a slowdown in automobile sales since April 2008. Sluggish demand has made it necessary for players to partly absorb input cost increases resulting in lower margins. CRISIL Research expects the deceleration to continue until 2009-10. Falling demand for Medium and Heavy Commercial Vehicles (MHCV) is mainly linked to the overall slowdown in industrial production. Transporters have deferred purchases despite stable freight rates, with rising cost of ownership impacting their profitability amidst concerns over freight demand sustainability. Due to demand-related concerns, freight rates are expected to decline in the second half of 2008-09, further affecting transporter profitability. CRISIL Research expects MHCV volumes to continue to decline by 5-10 per cent in 2008-09. Light Commercial Vehicles (LCVs), which have been clocking healthy double-digit growth over the last few years, are expected to register single-digit growth in 2008-09 owing to the existing high base. The domestic passenger car industry registered a moderate 6 per cent growth during AprilAugust 2008, after posting a 16 per cent growth in the first quarter of 2008-09. The rapidly changing finance scenario, increase in vehicle prices and fuel cost have pushed up the cost of ownership for a typical compact car by 4-5 per cent. CRISIL Research expects the domestic passenger car industry to register a 6-7 per cent growth in 2008-09. In the two wheeler segment, despite the existing tight finance scenario, sales growth recovered during April-August 2008-09, with increase in cash purchases and rising income levels in rural areas. CRISIL Research expects domestic two wheeler sales to grow by 7-8 per cent in 2008-09 as against the 9 per cent decline in 2007-08. The impact of the rise in raw material prices on the cost of sales of overall automotive chain is expected to be around 7 per cent in 2008-09. Margins of leading players are expected to continue to remain under pressure in 2008-09 despite OEMs absorbing only part of the surge in cost and passing the balance to the customers. CRISIL Research expects single digit growth rates to continue for automobile segments in 2009-10. Mr. Sachin Mathur, Head, CRISIL Research elaborated, "A moderate improvement in the outlook for the automobile sector in 2009-10 hinges on softening of input costs and fuel prices, financing rates remaining stable and continuation of the industrial investment cycle."

Research Report on "Indian Automobile Sector - A Booming Market"

In 2006-07, the Indian automotive industry provided direct employment to more than 300,000 people, exported auto component worth around US$ 2.87 Billion, and contributed 5% to

the GDP.

FOR IMMEDIATE RELEASE

PRLog (Press Release) Jun 09, 2009 De-licensing in 1991 has put the Indian automobile industry on a new growth track, attracting foreign auto giants to set up their production facilities in the country to take advantage of various benefits it offers. This took the Indian automobile production from 5.3 Million Units in 2001-02 to 10.8 Million Units in 2007-08. The other reasons attracting global auto manufacturers to India are the countrys large middle class population, growing earning power, strong technological capability and availability of trained manpower at competitive prices. These are the major findings of our new report, "Indian Automobile Sector - A Booming Market In 2006-07, the Indian automotive industry provided direct employment to more than 300,000 people, exported auto component worth around US$ 2.87 Billion, and contributed 5% to the GDP. Due to this large contribution of the industry in the national economy, the Indian government lifted the requirement of forging joint ventures for foreign companies, which attracted global to the Indian market to establish their plants, resulting in heightened automobile production. The Indian automobile market is currently dominated by two-wheeler segment but in future, the demand for passenger cars and commercial vehicles will increase with industrial development. Also, as India has low vehicle presence (with passenger car stock of only around 11 per 1,000 population in 2008), it possesses substantial potential for growth. Key Research Highlights - Passenger car production in India is projected to cross three million units in 201415. - Sales of passenger cars during 2008-09 to 2015-16 are expected to grow at a CAGR of around 10%. - Export of passenger cars is anticipated to rise more than the domestic sales during 2008-09 to 2015-16. - Motorcycle sales will perform positively in future, exceeding 10 Million units by 2012-13. - Value of auto component exports is likely to attain a double digit figure in 2012-13.

- Turnover of the Indian auto component industry is forecasted to surpass US$ 50 Billion in 2014-15. source: FPR Key Issues & Facts Analyzed in the Report Study of the Indian automobile industry structure. Analysis of performance of industry sub-segments and their future outlook. Understanding the Indian auto component market and its growth aspects. Evaluation of factors fuelling growth in the Indian automobile market. Discussion of the forces countering the market growth. Identification of future prospects for the Indian automobile industry.

Research Methodology Used in the Report Information Sources The information has been sourced from various authentic and reliable sources like books, newspapers, trade journals and white papers, industry portals, government agencies, trade associations, monitoring industry news and developments, and through access to more than 3000 paid databases.