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FITCH outlook on Indian auto sector

Ratings agency Fitch assigned a stable outlook for the Indian auto industry in 2012 and said passenger vehicles volumes are expected to grow by 3 to 5% during the year, with car sales increasing by up to 4%. It however said that commercial vehicles segment is likely to register a higher volume growth of 8 to 10%

Fitch Ratings in its 'Outlook 2012: India Auto' report said that "The 2012 outlook for the Indian auto industry is stable, driven by the expectation that the credit metrics of most companies, though may weaken, will continue to be in line with values expected during a cyclical downturn.”

It further said that "Fitch expects passenger vehicles to register volume growth of 3 to 5% in 2012, contributed by growth of 2 to 4% in cars, 6 to 8% in utility vehicles and 8 to 10% in multipurpose vehicles."

According to the report, the sales volumes of cars will be driven by growth in sales of diesel cars attributed to the pent up demand from 2011 which saw sales curtailed due to demand supply mismatches.

It said the auto sector will remain stable even as competition-led pricing pressure amid muted sales will lead to a drop in operating profitability and a consequent weakening of coverage and leverage indicators.

It said that "Fitch believes that a weakening of household finances and higher cost of ownership will continue to curtail the buying power of consumers in 2012, especially buyers of cars in small to mid size segments which contribute to the bulk of PV sales. Moreover, any reduction in interest rates this year is unlikely to boost auto sales significantly given negative sentiments of buyers with regard to general economic conditions.”

Regarding the commercial vehicles segment, Fitch said it is likely to register overall volume growth of 8 to 10 in 2012, driven largely by the sales of light commercial vehicles. This high volume will come as CVs are more dependent on consumer non discretionary activities and less on industrial activity.

The agency, however, warned that structural changes in the Indian auto industry in terms of increased number of companies is likely to restrict any significant improvement in margins from current levels, even during future economic upturns.