India Ratings & Research (Ind-Ra) has revised the outlook on the
auto industry to stable for FY16 from stable to negative based on the
early signs of a recovery in volumes being witnessed in 2HFY15 and on
the bottoming out of the sales decline. The agency however believes that
a significant jump in domestic volumes is unlikely in FY16.
The passenger vehicle (PV) segment is likely to post yoy volume growth of 2%-5% in FY16 driven by the car (3%-5%) and the utility vehicle (UV) segments (4%-7%). Ind-Ra believes that falling fuel prices along with improving household budgets have made PVs more affordable. In addition, the reduction in the fuel price differential between diesel and petrol has removed consumer uncertainty regarding the choice between diesel vehicles and considerably cheaper petrol vehicles, resulting in increasing demand for the latter. The 25bp reduction in the benchmark repo interest rate on 15 January 2015 could further speed up the recovery of PVs
The agency opines that exports of PVs, which contribute to the bulk of auto exports, provide resilience to the credit profiles of Indian auto original equipment manufacturers (OEMs), as India has now become a production base for exports. Additionally, auto exports, which were Europe centric around a decade ago, are today well diversified, with Africa and the Americas also emerging as major exports destinations. Ind-Ra believes that exports in FY16 will continue to be driven by Africa, followed by Asia and Europe.
Considering the high penetration of motorcycles in urban areas, their growth would largely be rural driven and hence contingent on adequate rainfall in the country as well as government spending on the rural sector. Motorcycle sales growth has tempered in the past two years largely due to the base effect. Ind-Ra-Ra expects volume growth of 2%-4% in this segment in FY16. Scooters on the other hand will continue to report strong growth of 20%-24% in FY16 given the smaller base, as well as key urban-centric demand drivers such as suitability for both the male and the female family members and increasing traffic congestion.
Ind-Ra expects the average industry EBITDA margin to recover by around 100bp-150bp because of demand recovery coupled with muted commodity prices, which it believes will last at least till 1HFY16. However, it also believes that acute competition and overcapacity may continue to weigh on the sector even after volume growth revives.
According to Ind-Ra analysis, most OEMs in the auto sector have low leverage, particularly those with a diversified product profile spanning multiple sub-sectors. This provides them the resilience to sustain economic downturns. With the uptick in demand, even OEMs with limited geographical or product diversification, such as those purely in the commercial vehicle space or in limited PV sub-segments, could also see their credit profiles strengthening due to growing volumes in these segments. Companies with a strong medium-heavy CV presence could see a marked recovery in FY16.
The FY14 capacity utilisation in PVs was around 58% of the estimated capacity of 5.3 million per annum. The agency expects capacity addition of around 770,000 units over FY15 and FY16, due to which utilisation in FY16 will remain low at 50%-55%, despite a modest volume recovery in this period. The agency expects a temporary fillip for PV sales following the November 2014 ruling by National Green Tribunal banning the sale of vehicles older than 15 years in the National Capital Region. The agency believes that similar bans if implemented in other parts of the country would translate into higher long-term demand for PVs and improved industry capacity utilisation.
What Can Change The Outlook?
Positive Outlook Unlikely: Given the structural issues of overcapacity and intensifying competition, Ind-Ra does not envisage a positive outlook revision in the event of a modest revival in sales. However, curtailment or postponement of planned capacity addition coupled with sales volumes equal to those in FY11-FY12 could have a positive impact on the credit profile of the sector.
Weak Demand, External Shock: A negative outlook revision could result from a decline in the sales volumes of various sectors in the industry due to a muted economic activity or otherwise.
Additionally, any external shock pressuring the rupee and a subsequent spurt in the interest rate may have a moderating impact on the economy. This may affect the volumes as well as the credit profiles of corporates in the sector.
The passenger vehicle (PV) segment is likely to post yoy volume growth of 2%-5% in FY16 driven by the car (3%-5%) and the utility vehicle (UV) segments (4%-7%). Ind-Ra believes that falling fuel prices along with improving household budgets have made PVs more affordable. In addition, the reduction in the fuel price differential between diesel and petrol has removed consumer uncertainty regarding the choice between diesel vehicles and considerably cheaper petrol vehicles, resulting in increasing demand for the latter. The 25bp reduction in the benchmark repo interest rate on 15 January 2015 could further speed up the recovery of PVs
The agency opines that exports of PVs, which contribute to the bulk of auto exports, provide resilience to the credit profiles of Indian auto original equipment manufacturers (OEMs), as India has now become a production base for exports. Additionally, auto exports, which were Europe centric around a decade ago, are today well diversified, with Africa and the Americas also emerging as major exports destinations. Ind-Ra believes that exports in FY16 will continue to be driven by Africa, followed by Asia and Europe.
Considering the high penetration of motorcycles in urban areas, their growth would largely be rural driven and hence contingent on adequate rainfall in the country as well as government spending on the rural sector. Motorcycle sales growth has tempered in the past two years largely due to the base effect. Ind-Ra-Ra expects volume growth of 2%-4% in this segment in FY16. Scooters on the other hand will continue to report strong growth of 20%-24% in FY16 given the smaller base, as well as key urban-centric demand drivers such as suitability for both the male and the female family members and increasing traffic congestion.
Ind-Ra expects the average industry EBITDA margin to recover by around 100bp-150bp because of demand recovery coupled with muted commodity prices, which it believes will last at least till 1HFY16. However, it also believes that acute competition and overcapacity may continue to weigh on the sector even after volume growth revives.
According to Ind-Ra analysis, most OEMs in the auto sector have low leverage, particularly those with a diversified product profile spanning multiple sub-sectors. This provides them the resilience to sustain economic downturns. With the uptick in demand, even OEMs with limited geographical or product diversification, such as those purely in the commercial vehicle space or in limited PV sub-segments, could also see their credit profiles strengthening due to growing volumes in these segments. Companies with a strong medium-heavy CV presence could see a marked recovery in FY16.
The FY14 capacity utilisation in PVs was around 58% of the estimated capacity of 5.3 million per annum. The agency expects capacity addition of around 770,000 units over FY15 and FY16, due to which utilisation in FY16 will remain low at 50%-55%, despite a modest volume recovery in this period. The agency expects a temporary fillip for PV sales following the November 2014 ruling by National Green Tribunal banning the sale of vehicles older than 15 years in the National Capital Region. The agency believes that similar bans if implemented in other parts of the country would translate into higher long-term demand for PVs and improved industry capacity utilisation.
What Can Change The Outlook?
Positive Outlook Unlikely: Given the structural issues of overcapacity and intensifying competition, Ind-Ra does not envisage a positive outlook revision in the event of a modest revival in sales. However, curtailment or postponement of planned capacity addition coupled with sales volumes equal to those in FY11-FY12 could have a positive impact on the credit profile of the sector.
Weak Demand, External Shock: A negative outlook revision could result from a decline in the sales volumes of various sectors in the industry due to a muted economic activity or otherwise.
Additionally, any external shock pressuring the rupee and a subsequent spurt in the interest rate may have a moderating impact on the economy. This may affect the volumes as well as the credit profiles of corporates in the sector.
