Ind-Ra: Macroeconomic Factors to Boost Demand for CVs; Large Issuers Resilient to Increased Capex

India Ratings and Research (Ind-Ra) has maintained a stable outlook for the auto sector for FY19 on expectations of moderate sales volume growth in the passenger vehicle (PV) segment, low double-digit growth in the commercial vehicle (CV) segment and steady growth in the two-wheeler segment (2W) on a year-on-year basis.

The credit profiles of most large players are likely to be unaffected in FY19 on account of low leverage and strong financial flexibility, despite debt-led capex plans. Thus, Ind-Ra has maintained a stable rating outlook.

Structural issues dominating the sector include i) intensifying competition ii) underutilisation of existing capacities in the CV segment and iii) technological and regulatory changes.

Product launches, adoption of stricter safety and emission norms, and development of electric vehicles (EV) would necessitate increased capex in the medium term.

Ind-Ra believes that the EBITDA margins of original equipment manufacturers could moderate in FY19, mainly due to i) higher raw material prices, ii) higher development and testing expenses related to new emission and safety norms and iii) the inability of original equipment manufacturers to pass cost inflation fully to customers owing to intense competition.

In FY19, demand for CVs, especially in higher tonnage categories, would benefit from i) infrastructure development ii) warehouse consolidation post the goods and service tax implementation, iii) the likelihood of an announcement of the vehicle scrappage policy and iv) the possibility of overloading bans in certain states.

Demand for PVs and 2Ws would be driven by increasing disposable income. In the PV segment, utility vehicles (UVs) would continue to drive the demand on account of an increasing customer inclination to compact UVs from sedans. However, a rise in fuel prices and a further decline in interest rates, which is highly unlikely, could curtail demand to a certain extent.

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