he outlook for the Indian auto component sector derives from Fitch Ratings’ outlook on domestic original equipment manufacturers (OEMs), as well as the agency’s 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). 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.

Export-focused players are likely to face additional pressure from receivable risks on the back of the deteriorating credit profiles of the large international auto majors...

Overview

The Indian auto sector (passenger cars and commercial vehicles (CVs)) underwent one of the longest and strongest positive cycles to end-September 2008 (Q3CY08), while year-on-year (yoy) sales growth has since decelerated rapidly. In Fitch Ratings’ 2008 Outlook for the sector, the agency acknowledged the inherent cyclicality of the demand pattern, wherein a three-to four-year growth spurt was followed by a two-year downturn.

However, Fitch’s expectation for a sector recovery from H2CY08 has been delayed due to various macroeconomic factors, including tight liquidity and credit availability, slower GDP and industrial production (measured by the index of industrial production (IIP)) growth rates, and depressed investment/consumer sentiment...