Auto ancillaries to gain from rupee depreciation: Fitch

Indian auto suppliers' credit profiles will largely remain stable in 2012, underpinned by the increasing focus of original equipment manufacturers (OEMs) on localisation, said ratings agency Fitch Ratings in a new sector report.

The agency noted that localisation would also prevent any sharp drop in revenue growth.

Exposure to different segments of the domestic automotive industry will help insulate diversified auto suppliers' operating cash flows from an expected sustained contraction in automotive sales in 2012. However, smaller companies catering to limited products/market segments are likely to be more affected until the macroeconomic situation improves.

"The focus on localisation by OEMs, in an attempt to curtail costs and diversify the geographical spread of suppliers, would drive the growth for auto supplies amid subdued auto sales", says Pragya Bansal, associate director in Fitch India's corporates team.

The current depreciation of the Indian rupee is likely to benefit auto suppliers in two ways: by increasing cost competitiveness of exports and by prompting OEMs to source components locally amid the rising cost of imports. India is a net importer of auto components, which presents a significant opportunity for domestic auto suppliers.

"But, deriving benefit from localisation and rupee depreciation would involve undertaking significant capex in capacity and capability building" added Bansal. The investment needs for capitalising on the opportunity seems very large in relation to the internal cash accruals of most of the suppliers, prompting the need for external sources of funds.