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MOTORINDIA
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August 2012
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is unlikely in the medium term even if interest rates are
reduced, due to the adverse impact of competition-led
pricing pressure on the financial profiles of OEMs.
Historically, LCV sales volume growth has shown
higher stability than MHCV volume growth across
entire business and interest rate cycles. In India, LCVs
are more often linked to economic activity in the non-
discretionary segment and used mostly for intra-city
shipments. MHCVs are more often used for inter-city
or inter-State transportation of mostly industrial goods.
Given the current interest rate scenario and expected
levels of industrial activity, MHCV sales are unlikely
to recover and should be driven more by replacement
demand than fresh capacity additions.
Heightened competition in the Indian auto market
may lead to a fall in operating margins. In addition,
with overall demand in the industry likely to remain
muted, OEMs are likely to respond with price dis-
counts to shore up volumes. This is likely to further
stress industry players’ operating margins this year.
Further, profitability margins of foreign auto OEMs
and JV companies may be pressured by limited indi-
genisation levels. If the rupee continues weak against
the US dollar, import costs for companies would be
higher, with exports providing only a partial hedge.
Competitive pressure in the past five years has
restricted the ability of auto OEMs to pass on increases
in the cost of key inputs such as steel, aluminium
and rubber. The prices of these commodities may fall
slightly, in line with lower industrial offtake globally,
providing some respite to OEMs. The net impact of all
of the above factors will be a 250bp-300bp reduction in
industry average operating margins.
Considering the adverse impact of the economic
slowdown on MHCV volumes, companies with a
presence mainly in this segment are likely to see their
financials coming under stress. Companies with a large
presence in LCVs could meanwhile maintain their
credit profiles at current levels based on a lower impact
of economic cycles on LCV volumes.
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AUTO INDUSTRY