Capex to increase 10 % amidst stagnant sales; credit profiles to remain stable, says CRISIL
Original equipment manufacturers (OEMs) 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.
An analysis of 11 CRISIL-rated OEMs, which constitute two-thirds of domestic sales, shows they will incur an aggregate capital expenditure of Rs.130 billion in this fiscal, or 10 % more than last, even as sales of passenger and commercial vehicles are expected to decline 9 %. Total sales volume of the industry, including two-wheelers, has been nearly stagnant for two years.
During slowdowns, companies typically cut back on capex to manage cash flows. CRISIL, however, believes the opposite will happen this time. Says Pawan Agrawal, Senior Director, CRISIL Ratings, “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 % in this fiscal from about 5 % two years back.”
The sector’s competitive intensity has increased with more and more global auto majors pitching tent, driven in by India’s long-term growth prospects. This is forcing OEMs to stay in capex mode, specifically in two areas - product development and technology. These two areas will account for two-thirds of the capex of Rs.130 billion this fiscal, while the rest will go towards maintenance and capacity expansion.
The capex towards capacity expansion will moderate this year due to stagnant volumes, but will pick-up pace once demand revives. That will add to the sector’s capital intensity over the medium term. Nevertheless, CRISIL-rated OEMs will maintain their stable credit risk profiles because of strong financials. 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.
Says Manish Gupta, Director, CRISIL Ratings, “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.”
On the other hand, 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.