Echoing the predictions of the auto OEMs, Fitch Ratings has provided an overall stable outlook for the auto sector in calendar year 2012, while forecasting a moderate single digit growth for the passenger vehicle segment and high single digit rise for commercial vehicle (CV) sales. However, it has warned that companies may face hit in their margins due to increasing competitive pressures besides sluggish demand scenario.

The passenger volume growth is to remain low at 3-5 per cent in 2012. High interest rates and high fuel prices should continue to dampen demand for the overall PV segment. A weakening of household balance sheets and lower disposable income are expected to adversely affect demand for vehicles for personal use, the rating agency said in its report.

During 2011, passenger car sales in the country saw a moderate growth of four per cent at 1.94 million units when compared with 1.87 million units in 2010.

Growth of overall CV volumes is forecast at 8-12 per cent in 2012. A moderation in industrial activity and an expected slowdown in infrastructure spending are likely to restrict medium and heavy CV volume growth to 3-5 per cent in 2012. However, light commercial vehicles, which are more dependent on consumer non-discretionary activities and less on industrial activity, will achieve a volume growth of 18-20 per cent this year.

Increasing numbers of competitors (currently 27 players in the cars/utility/commercial vehicles segment and nine in the two-wheeler segment) may structurally affect operating margins in the industry. Players are likely to face difficulties in passing cost increases on to customers, and instances of prices being cut to boost demand are likely to rise in 2012.

Structural change in the Indian auto industry in terms of increased number of companies is likely to restrict any significant improvement in margins from current levels, even during future economic upturns. There are 27 players in the cars/ utility/ commercial vehicles segment and nine in the two-wheeler segment at present.

The competitive landscape in 2012 may intensify, with subsidiaries of foreign auto manufacturers increasingly focusing on the Indian market, as their exports to developed countries are likely to be significantly affected during the year. Price-based competition amid sluggish sales is expected to reduce industry operating margins by 250-300bps in 2012.

The report also pointed out significant increase in production capacity for PVs (10 per cent) and CVs (25 per cent) in 2012. As a result, and given the muted demand growth industry, utilisation rates are expected to decline. Capacity additions to protect market share in the face of increased competition are expected to continue in 2013-2014. The capacity overhang in the medium term should add to pressure on margins, which are already being hit by demand moderation and increased competition.