India Ratings and Research (Ind-Ra) has maintained a stable outlook for the auto ancillary sector for FY19, based on the expectation of healthy growth in original equipment manufacturers (OEMs) volumes and continued replacement demand. The agency has also maintained a stable rating outlook on sector companies for FY19, based on the expectation of a steady profitability and comfortable credit profile.
Ind-Ra expects healthy growth across vehicle segments with moderate growth in the passenger vehicle segment, low double-digit growth in the commercial vehicle segment and steady growth in the two-wheeler segment. Further, the adoption of new safety and emission norms and technological advancements are likely to increase the content of auto components per vehicle, hence driving the volume growth of products compliant with regulatory requirements.
Although Ind-Ra expects the operating costs in the industry to increase in FY19 on account of cost escalation towards the implementation of changing regulatory norms and raw material pricing pressures, the agency believes that this will have a limited impact on the profitability of the sector companies as the volume growth would bring operating efficiencies and pass-through agreements with OEMs to limit the impact of raw material price fluctuation.
Further, Ind-Ra expects the capex of sector companies to relatively rise on developing products to meet stricter emission standards and higher R&D spending towards the greener technologies and solutions. Also, agency expects consolidation in the sector with some larger players embracing inorganic growth in the medium to long term. Nevertheless, the credit metrics of the sector companies are likely to remain stable in FY19 due to comfortable cash flows and liquidity.