India Ratings Downgrades Automobile Sector

India Ratings & Research (Ind-Ra) has revised its outlook on the Indian automobile sector for H2FY13 to stable-to-negative from its earlier stable rating.

On the passenger vehicles front, it has commented that overcapacity would lead to low utilisation. Moreover, an increase in competitive intensity is likely to take the margins lower. In contrast, the commercial vehicles space is likely to exhibit better margin recovery in the absence of these very factors, viz. capacity addition and high levels of competition. However, weak volumes and regulatory overhang in sectors like mining will contribute to the downward pressure for commercial vehicles manufacturers (OEMs).

Unfavourable macroeconomic conditions, movement of fuel prices, as well as high inflation levels and borrowing costs creating pressure on household finances have affected the demand for passenger vehicles. At the same time, increasing competition, overcapacity and moderating export sales have added to the pressure on Original Equipment Manufacturers.

In the commercial vehicles space, the sales of Light Commercial Vehicles (LCVs), which had kept the industry volumes buoyant so far, has been moderating lately. However, that of Medium and Heavy Commercial Vehicles (M&HCVs) have seen no improvement, and this has kept the performance of commercial vehicles where it was.

Overall, the industry has shown no signs of improvement. The macroeconomic conditions and consumer sentiment have continued to remain subdued. A good start to the monsoons provides some hope for higher rural demand in H2FY13. According to Ind-Ra, higher-than-expected agricultural output, and an improvement in export volume may cushion the possible weakening in the financial profiles of OEMs in 2013.