India Ratings revises its outlook on auto industry

Express News Service

Chennai: India Ratings & Research has revised its outlook for the automobile industry to stable to negative from stable.  This is the first time in six years that the agency has revised its outlook for the sector.

The outlook reflects the structural weakness in the passenger vehicle segment in terms of high capacity additions and intensifying competition which may potentially become entrenched in the industry structure. The agency expects the segment production capacity to increase to 6.5-6.7 million units by financial year 2016, up 33pc-37pc from financial year 2013. This, amid weakening drivers of demand, does not portend well for such capital intensive sector.
India Ratings expects margins of passenger vehicles to be under pressure due to enhanced competitive intensity, even if the demand recovers (unlikely though) financial year 2014 onwards. The need to continuously invest in model upgrades and new model introductions in passenger vehicles also drains cash flows. This added expense is an impediment to improvement in the credit profiles of passenger vehicle companies, particularly domestic original equipment manufacturers (OEMs), a release stated.
India Ratings expects domestic passenger vehicle volumes to fall by 5pc to 12pc in financial year 2014, led by the likely year on year decline in car volumes of 8pc-15pc. The agency believes the reduced demand for passenger vehicles is part of the overall slowdown in consumer discretionary spending. This is driven by consistently weak household finances and high cost of ownership on account of high fuel prices and interest rates.  
Sales of utility vehicles, the driver of passenger vehicle sales in financial year 2013, have slowed down from April 2013, following an increase in excise duty to 30pc from 27pc in March 2013.