Corporates

Auto Suppliers

2013 Mid-Year Outlook: Automotive Suppliers

Delayed Demand Recovery to Further Stress Credit Metrics
Outlook Report
Rating Outlook

Rating Outlook

STABLE TO
NEGATIVE

Prolonged Sluggish Demand: India Ratings & Research (Ind-Ra) has revised its outlook on
automotive suppliers for H213 to stable to negative from stable. This is because the agency
believes recovery in automotive sales will be slower-than-expected on the back of receding
demand. The still tepid economic growth outlook along with limited interest rate reduction is
likely to prolong the down trend in automotive sales which is likely to spread across segments.
As evident from the automotive sales numbers for January-May 2013, passenger vehicles
sales fell 10.5% (January-May 2012: up 11.4%) and commercial vehicles sales declined 7.6%
(up 15.6%) with medium and heavy commercial vehicles sale falling 26.7% yoy; while twowheeler sales were flat (up 10.7%).

Figure 1

Sharp Rupee Depreciation: The sharp depreciation in rupee (around 9.92% over January June 2013) may not benefit domestic automotive suppliers as export customers could demand
discounts. Localisation thrust has led to reduced imports by most original equipment
manufacturers (OEMs) and, consequently, their suppliers since FY11. However, the sheer
quantum of INR depreciation could pose challenges for the suppliers. Margins could be
impacted as suppliers may have to absorb a part of the higher costs on imported components
and may only be compensated with a lag.

Indian Auto Suppliers

Ratings Outlook
(%)
100

75.8

80
60

40
20
0

12.1
Positive

12.1
Stable

Negative

Source: Ind-Ra

Changing Working Capital Norms: The emergence of newer terms of trade with customers
could further impact the liquidity position of the suppliers. OEMs, in an attempt to maintain lean
manufacturing operations, have been pushing inventories down to the suppliers and distribution
network by negotiating new terms of engagement. Auto suppliers may also face higher funding
cost and stretched working capital cycles as the cash discounts being availed by few OEMs
have been discontinued to preserve liquidity.
Capability not Capacity Enhancement: In recent times, domestic suppliers have focussed on
innovation for more efficient products to de-risk their business through customer penetration
and diversification. This has become more important in the current scenario of depressed
volumes, leading to collaboration and consolidation owing to the limited standalone capability of
the suppliers. Ind-Ra believes this capability enhancement, though entails significant
investments for suppliers in the medium term, can be a key differentiator in the long run.

Related Research
2013 Mid-Year Outlook: Auto Sector (July
2013)

Analysts
Pragya Bansal
+91 11 4356 7253
pragya.bansal@indiaratings.co.in
Sudarshan Shreeniwas
+91 22 4000 1783
sudarshan.shreeniwas@indiaratings.co.in
N Raju
+91 44 4340 1703
n.raju@indiaratings.co.in

Credit Metrics to Stretch Further: Ind-Ra believes the leverage and interest coverage metrics
for domestic auto suppliers will further weaken in H213, rather than maintaining status-quo as
expected earlier. This is because despite being cautious, domestic auto suppliers have
borrowings on their books due to capex incurred on new launches and technology upgrades to
support OEMs from previous expansions. To further exacerbate the situation, a lot of this debt
is in the form of foreign currency loans which may increase the notional amount of borrowings
amid rupee depreciation, though actual serviceability could vary depending on the extent of
hedging.

What Could Change the Outlook

Prolonged Auto Sales Decline: A negative outlook may result from a continued fall in
domestic automotive sales beyond 2013, delaying improvements in the credit metrics of auto
suppliers.
Liquidity Key to Stable Outlook: Improved demand outlook along with an ability to preserve
liquidity through efficient working capital management leading to improved credit metrics could
cause the outlook being revised back to stable.

www.indiaratings.co.in

10 July 2013

Corporates
Figure 2

Select Coverage
Issuer
Axles India Limited
Beri Udyog Private Limited
Carraro India Pvt Ltd
Deltronix India Limited
EMITEC Emission Control Technologies India Private Limited
Emkay Automobile Industries Limited
Hema Engineering Industries Limited
Hi-Tech Gears Limited
IFB Automotive Private Limited
Imperial Auto Industries Limited
Kheria Autocomp Limted
Lifelong India Limited
Magneti Marelli Motherson Auto system Limited
Mahindra Ugine Steel Company Limited
Minda Corporation Limited
Minda SAI Limited
Motherson Advanced Tooling Solutions Limited
Perfect Alloy Components Limited
Pooja Forge Limited (PFL)
Punch Ratna Fasteners Private Limited
QH Talbros Limited
Sandhar Technologies Limited
Satyam Auto Components Limited
Shriram Pistons & Rings Limited
Sona Okegawa Precision Forgings Limited
Spun Micro-Processing Pvt. Limited
Steel Strips Wheels Limited
Sterling Tools Limited (STL)
Talbros Automotive Components Limited
TVS Srichakra Limited
Unitech Machines Limited
WABCO India Limited
ZF Electronics TVS (India) Private Limited

Long-Term Issuer Rating

IND A-/Stable
IND BBB/Stable
IND A-/Stable
IND BBB /Positive
IND BBB+/Stable
IND BBB-/Stable
IND BB/Stable
IND A/Stable
IND A/Stable
IND A-/Positive
IND B-/Stable
IND BBB+/Stable
IND BBB-/Stable
IND A /Stable
IND BBB/Stable
IND BBB/Stable
IND BBB-/Negative
IND BBB/Stable
IND BBB+/Stable
IND BBB-/Stable
IND BBB/Positive
IND A-/Stable
IND AA-/Stable
IND AA-/Stable
IND BBB/Stable
IND B+/Stable
IND A-/Negative
IND A-/Stable
IND BBB+/Negative
IND A-/Stable
IND A-/Negative
IND AA+/Stable
IND BBB/Positive

Source: Ind-Ra

2013 Mid-Year Outlook: Automotive Suppliers

July 2013

Corporates

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2013 Mid-Year Outlook: Automotive Suppliers

July 2013