Ind-Ra: MHCVs to Drive Volume Growth; Auto Outlook Revised to Stable

India Ratings & Research (Ind-Ra) has revised the outlook on the auto industry to stable from stable to negative for FY16. The revision in the outlook is based on the early signs of a recovery in volumes being witnessed in 2HFY15 and on the bottoming out of the sales decline.

We expect the volume growth in the commercial vehicle (CV) segments for FY16 to be driven by medium and heavy commercial vehicle segment (MHCVs; 13%-17% yoy), with the volumes of light commercial vehicles (LCVs) registering a marginal growth (0%-3% yoy).

We expect the MHCV segment growth in FY16 to be backed by higher growth in the second half than in the first half. This is based on the agency's expectation of stronger recovery in industrial activity in 2HFY16. While the moderate volume increase in 1HFY16 would likely be due to replacement demand, the volume increase during 2HFY16 will be driven by the expansion by fleet operators resulting in significant growth for the full year. Due to the lower cyclicality in LCV segment, it is expected to lag behind MHCVs in terms of recovery.

According to our analysis, the industry capacity utilisation in case of CVs in FY14 was around 50% of the estimated capacity of 1.4 million units. Despite the estimated recovery in volumes in FY16, utilisation levels are likely to reign in the range of 45% to 50% in case of CVs. Hence, despite this volume recovery, capacity overhang is likely to continue which could intensify the pricing pressure for original equipment manufacturers.

Ind-Ra expects growing volumes to benefit credit profiles of even those CV companies with limited geographical or product diversification. In particular, MHCV players could see a marked recovery in their credit profiles in FY16.

What Can Change The Outlook?

Positive Outlook Unlikely: Given the structural issues of overcapacity and intensifying competition, we do not envisage a positive outlook revision in the event of a modest revival in sales. However, the curtailment or postponement of planned capacity addition coupled with sales volumes equal to those in FY11-FY12 could have a positive impact on the credit profile of the sector.

Weak Demand, External Shock: A negative outlook revision could result from the sales revival for MHCVs witnessed thus far in FY15 not being sustained in FY16. A significant decline in the sales volumes of various auto industry segments due to muted economic activity or otherwise could also negatively impact the outlook.

Additionally, any external shock pressuring the rupee and the subsequent spurt in the interest rate could impact the economy moderately. This may affect the volumes as well as the credit profiles of auto companies.

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