Predicting a stable outlook for Indian auto sector in 2013, a ratings group has projected almost the same scenario as that of 2012, with a few changes in growth and margin outlook. It expects a low double-digit growth for the commercial vehicle segment and a high single digit rise for passenger vehicle volumes, but has warned that margins pressure for the OEMs to stay due to capacity glut and weak demand.

The muted volume growth in the passenger vehicle (PV) and commercial vehicle (CV) segments will continue in 2013 too. Low demand coupled with a capacity overhang (in PVs) and intensifying competition is likely to reduce industry operating margins on average by around 50-100 bps for the CV segment and 150-200 bps for the PV segment. However, as the major auto original equipment manufacturers (OEMs) have low financial leverage, their credit profiles are unlikely to be considerably impacted from a further slight weakening in credit metrics in the year, pointed out the report by the ratings company.

The overall growth in CVs is expected at 10-11% in 2013, driven by the light commercial vehicle (LCVs) segment that is expected to post YoY volume growth of 13-15%. The projected LCV volume growth rate is lower than the growth rate of 19.4% posted in the January to November period, with the moderation attributed to the likely increase in diesel prices.

Medium and heavy commercial vehicle (MHCV) sales which have a strong correlation with industrial activity, corporate capex and the government spending in infrastructure projects are likely to be exhibit a negative growth of 6-9% in the absence of fiscal and monetary policy actions by the government. Alternatively, increased government spending on infrastructure and other supportive fiscal measures could lead to YoY MHCV volume growth of 3-4% in 2013.

PV volumes in the country is expected to grow at 8-9% YoY in 2013, driven mainly by utility vehicles (UVs), which are expected to grow at 30-35%. Cars and vans which contributed 73% and 9% to domestic PV volumes in the January to November would display muted volume growth of 2-3% and 0.5-1.5% YoY, respectively in 2013. While weakening household balance sheets and high interest rates would continue to constrain demand, the likely reduction in price difference between petrol and diesel would also significantly impede revival in demand for diesel cars.

The structural change in the Indian auto industry due to the entry of several OEMs has translated into relentless pressure on operating margins of auto companies. Currently, there are 26 companies in the PV and CV segments and nine in the two-wheeler segment. With demand expected to remain weak in 2013, OEMs' operating margins could see further erosion due to discounts as they grapple with low levels of capacity use.

Operating margins of foreign auto OEMs and JV companies are likely to be under pressure due to limited indigenisation levels. Given the weakening of the rupee against most international currencies in 2012 (and unlikelihood of a significant recovery in exchange rates in 2013), import costs would remain high for these companies, with exports providing only a partial hedge.

Prices of metal commodities which constitute 50-60% of a vehicle's raw material cost on average to remain firm in India in 2013, despite a fall in global prices. This is due to import parity pricing of local manufacturers, and imports of metal commodities continuing to be expensive due to the depreciating rupee. As a result, commodity prices would continue to impact the margins of industry players in 2013. The ratings company believes that the net impact of the above factors to be a 150bps-200bps decline in margins in the PV segment and a 50bps-100bps decline in margins in the CV segment, report said.