Fitch: Indian suppliers’ margins to moderate this year

ACCORDING TO GLOBAL rating agency Fitch Ratings, the outlook for Indian auto suppliers remains stable in view of steady demaand, emanating from their diversified revenue streams, despite a likely easing of profitability in the second half of 2012. However, a fall in volumes in some sub-segments of the domestic automotive industry could manifest into lower revenue growth for certain suppliers.

The moderation in profitability is expected due to the limited ability of original equipment manufacturers (OEMs) to fully absorb high raw material prices, caused partially by a weaker rupee, alongside an increase in other input costs. “The Indian auto supplier sector has benefitted from increased export competiveness on account of rupee depreciation along with the revival in demand from the US and penetration into new export markets. However, subdued growth in Europe negated part of the positive impact of the weaker rupee”, says Pragya Bansal, associate director in Fitch’s Corporates team in India. OEMs’ increased thrust on localisation of imported components and newer vehicle technologies should keep capex requirements high for auto suppliers over the medium term as well. The sector has made significant investment over the last five years in capacity additions and building technical capability.

Fitch expects an easing of operating profitability along with a lengthening of credit cycle to necessitate the need for higher working capital. This is in addition to the long-term borrowings from previous capex plans or proposed projects, which would be likely to weaken the credit metrics of auto suppliers over H212. However, the limited exposure of Indian auto suppliers to foreign currency borrowings would help prevent any large alteration in their credit metrics in 2012 from rupee depreciation.

A sharper and widespread fall in automotive volumes beyond 2012 could adversely impact OEM’s operating cash flows and in turn lengthen their payable periods to auto suppliers.

Auto suppliers’ stressed liquidity through higher working capital borrowings could constrain their financial flexibility for completion of capex plans and may cause a revision in the outlook to negative.

Fitch-rated Indian auto suppliers include Shriram Pistons and Rings (‘Fitch AA-(ind)’/Stable), Hi-Tech Gears (‘Fitch A(ind)’/Stable), Sandhar Technologies (‘Fitch A-(ind)’/Stable), Sterling Tools (‘Fitch A-(ind)’/Stable), and Minda Corporation (‘Fitch BBB+(ind)’/Stable).