Corporates

AutoSuppliers
India
SpecialReport

2009 Auto Components Outlook

Mirroring the OEMs

FitchCoverage

Overview

Current
Rating
Issuer
Gabriel India Limited
F2+(ind)
HiTech Gears Limited
A(ind)/
Stable/
F1(ind)
KLT Automotive & Tubular BBB+(ind)/
Products Limited
Stable/
F2+(ind)
LG Balakrishnan & Bros
A(ind)/
Limited
Negative
Omax Autos Limited
F1(ind)
Phillips Carbon Black
A(ind)/
Limited (PCBL)
Stable/
F1(ind)
Rico Auto Industries Limited A+(ind)/
Negative
Shriram Pistons & Rings
AA(ind)/
Limited
Stable/
F1+(ind)
Talbros Automotive
BBB+(ind)/
Components Limited
Stable/
F2+(ind)
TVS Srichakra Limited
BBB+(ind)/
Stable/
F2+(ind)
Unitech Machines Limited
F1(ind)

Analysts
Pragya Bansal
+91 11 4165 7230
pragya.bansal@fitchindia.com
Abhinav Goel
+91 11 4165 7230
abhinav.goel@fitchratings.com
Priyamvada Balaji
+91 4000 1700
Priyamvada.balaji@fitchratings.com

RelatedResearch
Fitch Sees Grim 2009 Outlook for U.S.
Auto Companies (9 Dec 08)
Liquidity Focus: US Auto Suppliers (27
Oct 08)
European Auto Supply Industry Credit
Quality Worsening (20 Nov 08)
Europe's Auto Industry Faces Increased
Challenges (20 Nov 08)

The outlook for the Indian auto component sector derives from Fitch Ratings
outlook on domestic original equipment manufacturers (OEMs), as well as the
agencys outlook on the global automotive sector. With substantial demand and
margin pressures being faced by both Indian and international OEMs, the domestic
auto component sector is also likely to face substantial operating pressures in
calendar year 2009 (CY09). This Outlook is to be read in conjunction with Fitchs
2009 outlook for the Indian auto sector titled 2009 Indian Auto Sector Outlook
More an LShaped Recovery, published 27 January 2009.
Component players will likely face demand pressures in line with their customers,
although the impact on cash flows could likely be more severe in view of OEMs
lengthening their payment periods. Exportfocused players are likely to face
additional pressure from receivable risks on the back of the deteriorating credit
profiles of the large international auto majors. The risks are accentuated by the
relatively higher leverage amongst many players a consequence of the additional
debt taken on to finance their capex to meet the increasing capacities of OEMs.

DemandPressuresinBothDomesticandExportMarkets
The demand outlook for the component sector remains negative, reflecting the
ongoing pressures being faced on both the domestic and international scene. With
the depressed scenario likely to continue over the short to mediumterm, and a
softer recovery curve, the auto component sector is also likely to face significant
demand pressures over the same timeframe. Many component manufacturers had
anticipated some cushion from export demand, which they believed would be
countercyclical to the domestic cycles and result in better earnings stability.
However, the international markets have also faced severe pressure over endCY08,
which will most likely extend over CY09 as well; and, as a result, Fitch does not
expect any major positives on the demand front over the near term.
Fitch notes that those players more focused on the commercial vehicle (CV) market
are likely to be more severely impacted than those with more diversified product
and customer profiles. Component manufacturers with a strong aftermarket
component of sales could also be in a better position, and be relatively less
affected by the ongoing slowdown.
Whilst the recent decline in the Indian rupee/US dollar exchange rate will make
Indian components cheaper for the international auto majors, Fitch does not
believe that the impact will be sufficient to boost export demand. The positives
could likely be offset by the ongoing decline in volume.

MarginPressuresonLowCapacityUtilisationSupported
bySofterCommodityPrices
With most auto OEMs in India and abroad facing difficult markets, attempts are
being made to mitigate the impact on their margins by demanding more price cuts
from vendors. In addition, with lower capacity utilisation for the sector following
production cutbacks at the OEMs, overheads are likely to remain high in relation to
existing volumes. Many companies are also sitting on idle capacity built over CY08,
in anticipation of export orders which have not materialised.

www.fitchratings.com

28January2009

Corporates
The higher fixed costs without commensurate volumes will likely have a further
adverse impact on component makers operating margins. However, some relief
from softer commodity prices could be expected over the short to mediumterm,
once the highercost inventories are liquidated. Fitch believes, however, that
further price cuts beyond current levels (barring a passthrough of commodity price
benefits) would probably be limited, as many component makers have already given
major price concessions in CY08.

Cash Flow and Liquidity Pressures from Working Capital

The OEMs are attempting to alleviate their own liquidity pressures by increasing
their payable periods to auto component players. This has resulted in a significant
increase in working capital requirements for most operators. In the case of exports,
the risks are accentuated by the deteriorating financial profile of international
majors such as General Motors Corp. (C) and Ford Motor Company (CCC), which
has, in certain cases, limited the availability of export credit from banks. Working
capital has also increased due to high inventories a consequence of the cutbacks
in production at the major OEMs. This has put significant pressure on component
makers shortterm liquidity. These companies have increased utilisation of their
working capital limits, and in some cases taken ad hoc limits from their bankers.

CapexandHighLeverageAccentuateFinancialRisksinthe
NearTerm
The cash flows of most component makers are likely to come under pressure over
CY09 in light of slower demand and higher working capital requirements. Much of
the increased working capital requirements is also likely to be financed through
debt, which will further increase leverage and lower interest cover ratios for many
players.
Many component players also have large term debt on their books, which was used
to finance capex. Anticipating a substantial spurt in export orders, coupled with the
expansions announced by domestic OEMs, component makers entered into large
debtled capex programmes. A part of this capex was also required to meet the
requirements of the new product launches scheduled by the OEMs. While some of
the component manufacturers have deferred some of the expansion (in line with
that of the OEMs), those which have already commissioned capacity have not
achieved the targeted utilisation levels. In these cases, the repayments have
started to fall due over CY09 and CY10, which exposes the companies to refinancing
risks as current cash flows are not adequate to finance the repayments.

CreditProfilestoRemainUnderPressureovertheShortto
MediumTerm
The profitability and financial profile of the auto component manufacturers are
expected to worsen over the near term, in light of Fitchs expectation of a subdued
demand environment, and in line with its outlook for OEMs. Margins and credit
metrics are also likely to remain under pressure. A soft recovery, lagging that of the
OEMs, is anticipated only towards CY10. Exports are likely to remain subdued for
longer, reflecting the agencys expectation of a delayed recovery (only towards
CY11) in most developing markets.
While Fitch has factored these short term pressures in its ratings and expects
ratings to remain largely stable in CY09, downside risks do exist in the event
demand slowdown remains more prolonged or deeper than presently anticipated.
During 2008, Fitch took the following rating actions on auto component
manufacturers:

Downgraded Gabriel India Limiteds CP programme rating to F2+(ind) from

F1(ind)

2009 Auto Components Outlook Mirroring the OEMs

January 2009

Corporates

Downgraded Rico Auto Industries Limited (Rico) to A+(ind)/Negative from AA

(ind)/ Stable

Revised LG Balakrishnan & Bros Limiteds Outlook to Negative from Stable;

rating affirmed at A(ind)

Downgraded Hinduja Foundries Limiteds CP programme to F2(ind) from

F1(ind), and withdrew the rating

Revised KLT Automotive & Tubular Products Limiteds Outlook to Stable from
Positive; ratings affirmed at BBB+(ind)/F2+(ind).

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2009 Auto Components Outlook Mirroring the OEMs

January 2009