Ind-Ra: Stable Outlook Maintained for Auto Ancillaries for FY17

India Ratings and Research (Ind-Ra) has maintained a stable outlook on the auto ancillaries sector for FY17. This is based on the expectations of healthy demand from original equipment manufacturers (OEMs), continued momentum in sector exports and a likely increase in demand from non-auto segments (mainly defence, railways and aerospace) along with a marginal improvement in profitability and a stable credit profile. Ind-Ra expects the sector revenue (volume) to grow by 10%-12% in FY17.

Ind-Ra expects exports from the sector to grow at 12%-15% in FY17 driven by the increased focus of major sector companies. However, rupee movement against key currencies such as Chinese renminbi, Thai baht, euro, US dollar would impact export competitiveness. Import continues to exceed exports for the sector and grew at a CAGR of 11.1% over FY10-FY15. Imports from China and Thailand sharply increased in FY15 year-on-year by around 20% and 17%, respectively. Declining demand in the domestic market could also lead to some of the countries pursuing an aggressive export strategy and an increase in import pressures in FY17.

Ind-Ra expects the operating margins of sector companies to improve by 50-100bp FY17 driven by operating leverage. Benign raw material prices are likely to have a limited positive impact on the profitability of sector companies due to the pass-through agreement with OEMs. Capex is likely to be limited in FY17 for sector companies, as current capacities are sufficient for the medium-term. New project announcements in the sector reduced by three-fourths in FY15; while projects outstanding halved at FYE15.

Sector companies continue to show strong credit metrics marked by low leverage and high interest coverage. Liquidity is likely to remain comfortable across the sector in FY17 with the majority of companies reporting strong cash flow from operations and even positive free cash flows. Thus, the credit metrics of sector companies are also likely to remain stable in FY17.

The agency has also maintained a Stable rating Outlook on sector companies for FY17. Ind-Ra's analysis indicates that within its rating universe, around 88% companies were either affirmed or upgraded during 2015 (2014: 70%) reflecting the credit strength of these companies.

OUTLOOK SENSITIVITIES

Aggressive Expansion Plans: A significant uptick in capex announcements in FY17 on the back of favourable policy decisions as well as higher demand expectations from both auto and non-auto segments could strain the cash flow and stretch the credit profile of sector companies resulting in a negative sector and rating outlook.

Auto Demand: Weaker-than-expected growth in domestic auto sales could negatively impact the financial profile.

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