[sustran] Fitch Ratings augur well for auto industry in 2010 with 10-12 per cent growth

Vinay Baindur yanivbin at gmail.com
Tue Jan 19 17:14:47 JST 2010


http://wheelsunplugged.blogspot.com/2010/01/fitch-ratings-augur-well-for-auto.html
 Monday, January 18, 2010  Fitch Ratings augur well for auto industry in
2010 with 10-12 per cent
growth<http://wheelsunplugged.blogspot.com/2010/01/fitch-ratings-augur-well-for-auto.html>

Fitch Ratings Indian Auto Sector Outlook 2010 report just released augurs
well for the Indian auto industry - an overall growth in sales of 10 -12 per
cent during 2010; Passenger Vehicle (PV) volumes a 12-14 per cent and
Commercial Vehicles (CV) a 5-6 per cent growth. This would however, lead to
sharp increase in capex plans, offseting the positive impact on credit
profiles of higher volumes and lower inventories. The trend should fall in
line with the improvement in the domestic economic environment and improved
availability of credit. Against domestic sales, exports would remain an area
of concern— due to the slowdown in global automotive markets and the expiry
of scrappage incentives for replacing older vehicles (as were offered for
PVs in 2009). PV sales began to improve from June 2009, and CVs from October
2009. The PV rebound has been supported by an improving liquidity scenario
and restoration of consumer confidence; modest growth in industrial
production, together with the government stimulus, has brought about
stability in CV sales, though at lower levels than for PVs.



CVs segment has seen cyclical patterns, typically a period of two to three
years of high growth which is then followed with a similar downward cycle —
to which the CV manufacturers were exposed during 2008 and most of
2009. Improving industrial production and economic growth rates, coupled
with a reversal of more than two years of downtrend, are likely to spur a
positive track for CV manufacturers in 2010. Domestic CV sales grew by
22.3per cent during April-December 2009 compared with the comparable period
in 2008, building on the recovery in demand beginning Q409. However, growth
trends have distinctly varied within the CV segment — depending on the
tonnage capacity and end use, as light commercial vehicles (LCVs) have been
able to maintain their ground while medium and heavy commercial vehicles
(M&HCVs) continued to face pressure due to the decline in industrial output.
The M&HCV segment is now stabilising with the higher industrial production,
while the LCV segment is showing a more rapid recovery.



Fitch expects the full year 2010 numbers to reveal moderate growth in the
range of 5- 6 per cent for domestic sales, with the first few months being
driven by regulatory guidelines pertaining to fiscal benefits and less
stringent emission norms.



The agency believes that the polarisation in the CV market should continue,
with higher growth rates for the lower and heavier ends of the spectrum.
This is also evident from the capacity addition plans of original equipment
manufacturers (OEMs), wherein most of the capacity is being added in the LCV
segment (less than 1.5 tonne gross vehicle weight) by Tata Motors Limited
and Mahindra & Mahindra Limited. The heavy range of trucks is receiving
investment essentially from new entrants such as Daimler AG
('BBB+'/Negative), the Nissan Motor Co. Ltd. ('BBB'/Negative)‐Renault SA
('BB'/Negative)‐Ashok Leyland Ltd. ('AA‐(ind)'/Negative) JV, and the
Mahindra & Mahindra‐International Truck & Engine Corporation (ITEC) JV.
Export volumes should remain under pressure, as significant international
capacity is lying unutilised. There was an easing in late-2009 in the
decline of freight volumes, and higher fuel and financing costs, which
contributed to the weak sales of CV manufacturers during 2009 as a whole.



Combined with government's stimulus to revive the domestic CV industry
through the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), this
has added to the order-book position of CV manufacturers — since a
significant portion of the cost involved in replacement of the older fleet
of state transport undertakings (STUs) is borne by central government. Many
of these orders are likely to be executed over the next couple of months up
to March 2010, for the manufacturers to avail themselves of the fiscal
benefits. The accelerated depreciation benefit offered for CV purchases
during early 2009 expired in September 2009, although volumes continued to
show positive yoy growth due to the low base effect. The switchover to new
emission norms from April 2010 should support demand during Q1 of 2010, as
operators pre-empt their purchases to save on higher costs brought about by
the tighter emission norms. However, the recovery in the overall economic
environment should drive CV growth prospects in the long term.



PV sales, which clearly suffered amid the global liquidity and credit crisis
during Q4 of 2008, started posting growth from H2/2009 after reeling under
pressure for about a year. The recovery in demand for domestic PVs,
propelled by new model launches, discount offerings by OEMs, and easy and
cheaper consumer finance, has come earlier than anticipated by Fitch.



Furthermore, monetary incentives offered by governments in international
markets helped the cause of Indian PV manufacturers, as their product
portfolio comprised smaller, fuel-efficient vehicles entitled to such
incentives. As a result, exports from India increased significantly by 28.8
per cent Y-o-Y during April-November 2009, benefitting small car
manufacturers such as Maruti Suzuki India and Hyundai Motors India. The
termination of these monetary incentives in international markets is likely
to affect export volumes, which constituted about 19 per cent of total sales
volumes for Indian manufacturers during April-November 2009.



The easy credit availability and affordable cost of consumer finance could
continue to have a positive impact on domestic car volumes during 2010, with
accelerated purchases during the first few months in anticipation of the new
emission norms from April 2010 — and the consequent increase in vehicle
prices. This demand advancement, along with the higher vehicle prices as a
result of tighter emission and safety norms from April 2010, could put
pressure on short-term volume growth after April 2010. There could also be
issues with regard to availability of fuel to meet the new emission norms
from the oil companies, which could also impact sales.



Domestic PV sales registered a 21.2per cent growth during April-November
2009 compared with the same period the previous year. Most growth was
brought about by the compact, or "A2" segment as defined by Society of
Indian Automobile Manufacturers, as many new models were launched. The
utility vehicles segment has also started showing signs of growth due to a
reduction in excise duty, and demand emanating from semi-urban and rural
markets.

Given the favourable demographic profile and economic growth prospects, many
OEMs have announced the launch of smaller, affordable and fuel-efficient
vehicles over the next 12 months. Many global OEMs with a limited presence
in the compact car segment are planning to tap the segment in collaboration
with established small car manufacturers, through their global tie-ups such
as the Volkswagen Group ('BBB+'/Stable)-Suzuki combine and the General
Motors Shanghai Automotive Industry Corporation (SAIC) venture. As a result,
the compact car segment — currently dominated by Maruti Suzuki India,
Hyundai Motor India and Tata Motors —shall become increasingly fragmented.
Thus, the growing volumes in the compact car segment, which contributed more
than 58per cent of total domestic volumes in April-November 2009, shall
largely guide the growth in the domestic PV segment. Overall, the agency
expects the PV segment to grow by between 12 -14per cent through 2010.



The lengthening of the working capital cycle due to inventory pile-up and
limited credit availability, which forced production cuts across the board
in 2009, has started to return to earlier levels. This has partly been aided
by the off-take of inventory over time with the alleviation of the tight
liquidity situation. Despite the shortening of the working capital cycle
from 2009's levels, the leverage of OEMs is likely to remain high over the
medium term — owing to restoration of their capex plans.



A large number of OEMs which had deferred their capex plans in the wake of
the difficult operating environment in early 2009, have resumed the capital
spending — for ramping up capacity, for developing new products/adapting
existing ones to local requirements, or for compliance with new emission and
safety norms. Many global OEMs which had hitherto been carrying out assembly
operations are setting up production units to cater to the domestic and
global demand.



The existing players have also announced plans for capacity addition, in
order to maintain their market share in the wake of competition. As a
result, the next two years to 2012 could bring a further 0.9 million PV
units (accounting for about 35per cent-40per cent of current capacity) and
0.6 million CV units (estimated to be around 80per cent of current capacity,
with significant additions in the LCV segment).



Together with OEMs focusing on localising certain key components in a bid to
reduce costs, these developments could result in significant capex over the
next two years.



Fitch notes that the big-ticket capex plans of the OEMs are likely to mean
significant negative free cash flow (FCF), as operating cash flows should be
limited owing to margin pressures and rising competitive intensity. Since
much of this negative FCF is likely to be funded from borrowings, Fitch
expects financial leverage for OEMs to remain high over the medium term.



India's demographic profile — with a large, growing middle class and low
vehicle penetration — has attracted many global OEMs which plan to use the
country as a regional production base. In the PV segment, many of these
players are introducing products specifically designed for the local Indian
market. This is reflected in the number of new launches from existing (as
well as new) entrants in the PV segment scheduled for 2010. The CV segment
is also witnessing increased competition from global OEMs targeting India to
capitalise on the country's economic growth.



Many international OEMs are coming in either independently or in
collaboration with existing players — with the objective of reducing time to
market and to take advantage of an established distribution network. The
Indian auto sector is likely to witness significant competition by 2012 when
most of the new capacity comes on stream. This is in turn likely to result
in under-utilisation of capacity in the medium term, on account of the
demand/supply mismatch.

The number of new players, as well as the higher number of new product
launches from existing players, is likely to increase competitive intensity
over the medium term. Coupled with pressure on utilisation levels, this
could lead to increased price competition and consequently margin pressures,
as multiple players attempt to gain market share.


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