OEMs' need for localisation to prop up ancilliary units

Fitch, on Wednesday, assigned a stable outlook to domestic auto components sector in 2012 saying it is expected to perform well on the back of demand from original equipment manufacturers for localised content.

“Indian auto suppliers’ credit profiles would largely remain stable in 2012, underpinned by the increasing focus of original equipment manufacturers (OEMs) on localisation. The latter would also prevent any sharp drop in revenue growth,” said Fitch Ratings in its report titled ‘2012 Outlook: Indian Automotive Suppliers’.

The report comes a day after Fitch gave stable outlook to the Indian auto sector and forecast passenger vehicle sales volumes to grow by 3-5 per cent and the commercial vehicles (CVs) segment by 8-10 per cent during the year.

It also said the current depreciation of rupee is likely to benefit auto suppliers in two ways. One, it will increase the cost-competitiveness of exports and prompt OEMs to go for local sourcing of components. Secondly, it also presents an opportunity for domestic firms as India is a net importer of auto components.

During the current fiscal, the rupee has depreciated by over 16 per cent against the US dollar till date.

Further, Fitch noted that exposure to different segments of the domestic automotive industry will help diversified auto suppliers’ insulate operating cash flows.

However, it warned that smaller companies catering to limited products or market segments are likely to be more affected until the macroeconomic situation improves.

In this context, Fitch India Associate Director Pragya Bansal said, “The focus on localisation by OEMs, in an attempt to curtail costs and diversify the geographical spread of suppliers, would drive the growth for auto supplies amid subdued auto sales.”

All the same, Fitch said for deriving benefits from localisation and rupee depreciation, component-makers would have to make significant investments in capacity and capability-building.

“The investment needs for capitalising on the opportunity seems very large in relation to the internal cash accruals of most of the suppliers, prompting the need for external sources of funds. This would drive up debt for most of the suppliers, though some part of this could also be funded by way of fresh equity,” the report said.

Furthermore, Fitch said bilateral and regional trade pacts being negotiated between many countries could potentially change international trade flows over the medium-to-long term.