Despite weak demand, auto OEMs to spend more on technology

A weak demand for automobiles notwithstanding, original equipment manufacturers are likely to spend more on technology and product development in view of intense competition in the sector, a report said today.
"OEMs (original equipment manufacturers) in the automobile sector are facing a second straight year of weak demand, yet the heat of competition is forcing them to spend more on product development and technology," said the report by rating agency Crisil.
During slowdowns, companies typically cut back on capex to manage cash flows.
The agency analysed 11 of its rated OEMs, which constitute two-thirds of domestic sales, and found they will incur an aggregate capital expenditure of Rs 130 billion in FY 2014, or 10 per cent more than last fiscal, even as sales of passenger and commercial vehicles are expected to drop 9 per cent.

"Domestic auto OEMs are being compelled to invest in new product launches and upgrade technology because of intense competition. As a result, their capital spend as a percentage of revenue will increase about 100 basis points to almost 6 per cent in this fiscal from about 5 per cent two years back," Crisil's Senior Director Pawan Agrawal said.
The report said the sector's competitive intensity has increased with more global auto majors pitching tent, driven in by the country's long-term growth prospects. "This is forcing OEMs to stay in capex mode, specifically in two areas - product development and technology."

The capex towards capacity expansion will moderate this year due to stagnant volumes, but will pick up pace once demand revives, the report said.

The report maintained the strong financials of Crisil- rated OEMs is likely to help them maintain stable credit risk profiles.
On an aggregate basis, they will have more than two- thirds of their adjusted debt of Rs 345 billion in the form of cash or equivalents by March 31, 2014, it said.
"Domestic auto OEMs such as Maruti Suzuki, Mahindra & Mahindra, Bajaj Auto and Hero MotoCorp have strong balance sheets. Moderate debt and healthy liquid surplus provide these companies with adequate cushion to absorb the capex and weather the slowdown," Crisil Director Manish Gupta said.

The report further said subsidiaries of global auto players such as Volkswagen and Daimler will continue to derive significant business and financial support from their parents which consider India as a long-term bet.