Corporates 

Auto & Related  India  Special Report 
Fitch Sample Coverage 
Issuer
National Ratings Ashok Leyland Ltd. International Ratings AB Volvo Chrysler LLC Daimler AG Dongfeng Motor Group Company Limited Fiat S.p.a Ford Motor Company General Motors Corp. Honda Motor Co., Ltd Hyundai Motor Company Nissan Motor Co., Ltd. Peugeot S.A Renault SA Toyota Motor Corporation

2009 Indian Auto Sector Outlook – 
More an “L”­Shaped Recovery 
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. Fitch remains cautious with regard to the demand outlook for the sector in calendar‐year 2009 (CY09), as these key environmental factors are unlikely to improve in the near term. Fitch expects volumes to stabilise over H1CY09, although at lower levels than in CY08. This will result in negative yoy growth rates compared with CY08 until end‐ 2009, when the high base effect is corrected. Whilst the long‐term fundamentals of the sector remain strong, the reversion to long‐term growth rates (around 10%‐12% for cars and 8%‐10% for CVs) is likely to take longer and be slower than in earlier cycles. The agency expects the industry volume graph over the medium‐term to follow more of an “L”‐shaped pattern rather than the “U”‐shaped pattern seen through the earlier positive cycle. Furthermore, exports have been unable to provide the earlier cushion over CY08 due to a severe slowdown in their respective markets. 

Current Ratings
AA(ind)/Negative

A‐/Stable/F2 C A‐/Stable/F2 BBB/Stable BBB‐/RWN/F3 CCC/Negative C A/Negative/F1 BB+/Negative/B BBB+/Negative/F2 BBB+/Negative/F2 BBB/Negative AA/Negative/F1+ 

Analysts 
Priyamvada Balaji +91 4000 1700 Priyamvada.balaji@fitchratings.com N Raju +91 44 4340 1700 n.raju@fitchratings.com Pragya Bansal +91 11 4165 7230 pragya.bansal@fitchindia.com 

CV Decline to Continue over the Short to Medium Term 
Growth rates have traditionally been more volatile for CVs than for cars — a trend being indeed witnessed in the current slowdown. Domestic CV sales declined by 9.5% in April‐November 2008 compared with the same period in 2007, to 298,208 units. However, the full impact of the deceleration will only be seen in the April– March financial year‐end (FYE09) figures, as the yoy declines continue through Q1CY09. Although CV makers have been offering discounts, it has not been enough to offset the current negatives being faced by freight operators — a reflection of the current economic environment. Operators have faced pressures over H2CY08 due to the following: · Pressure on freight volumes due to lower freight demand from exporters, slower growth in IIP, and competition from railways for large commodities. This, coupled with increased capacity built up over the cycle, has led to lower capacity utilisation. Operators have also faced severe cost pressures due to higher fuel and financing costs, putting further pressure on margins. However, with excess capacity, they have relatively limited ability to pass these costs on to their customers. This is seen in the softer trends in the freight indices. However, the recent softening in interest rates and reduction in fuel costs over H2CY08 could boost operators’ liquidity, although with a lag effect. Operators are also facing issues with regard to the higher cost of credit, and availability of finance with regard to new truck purchases. The problem is compounded by Fitch’s expectation of higher NPL levels across truck financiers, which could further hamper credit availability. 

Related Research
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www.fitchratings.com 

27 January 2009 

Slower demand has led to inventory pile‐ ups both at the dealer level and at the OEMs’ own plants.  Car Sales also Negative.  Rising Working Capital Pressures across the Sector  Slower demand coupled with lack of financing access by dealers has put pressure on the working capital cycles of most OEMs. including continued positive growth in freight volumes and stabilisation of freight rates at higher levels. This will in turn put pressure on their liquidity and credit metrics over the short to medium term. But these production cuts have taken place with a lag effect. As production and dispatches continue to lag market demand. lower margins and higher working capital requirements. The current lower capacity utilisations across the sector will also likely magnify the margin impact of overheads. However. Interest coverage is likely to remain under pressure due to a combination of 2009 Indian Auto Sector Outlook – More an “L”‐Shaped Recovery January 2009  2  . resulting in stretched working capital cycles for most OEMs and putting further pressure on their liquidity. as well as softer input prices (steel. although this will be one‐time in nature — similar to that of the overloading ban two years ago. However. Although some relief can be expected over the near‐term from price cuts from vendors. as well as stretching their suppliers’ payment terms to finance this liquidity mismatch. although this will also increase competitive intensity. car and CV makers have been taking corrective measures. primarily in the form of cutting back on production to prevent further inventory pile‐ups. and anticipates a marginal soft recovery to start towards end CY09.Corporates Fitch notes that stable CV demand remains contingent upon a stable economic environment. Demand could also benefit towards end‐CY09 from the advancement of purchases in anticipation of the new emission norms in April 2010. Fitch expects car sales to recover faster than CVs once credit availability is eased. copper and aluminium). which have helped mitigate the decline in volumes. Volumes in CY09 are also likely to be supported by the large number of new launches planned by various players. Car makers have also been offering incentives and discounts to stem the ongoing slowdown in sales. combined with lower visibility of income growth. this will benefit OEMs only once the current raw material inventories purchased at higher costs are liquidated. Fitch expects the situation to correct itself over the short term. primarily due to increased financing costs and lack of credit availability. although this has resulted in a re‐alignment of market share away from players with aging product portfolios. but not as Bad as for CVs  Car sales started to decline over H208. This will likely lead to an improvement in the financial and liquidity position of operators. OEMs are stretching their utilisation levels of working capital limits. However. The extent of decline has been partly mitigated by the number of new model launches.  Margin Pressures across the Board  The discounts being offered by original equipment manufacturers (OEMs) are likely to have a significant impact on their operating margins over the short term. Car sales have primarily been impacted by the availability and currently high cost of consumer finance.  Deterioration in Credit Profiles – Partly Mitigated by  Deferments in Capex  Most OEMs are likely to face substantial pressure on operating cash flows due to slower demand. Domestic car sales remained largely flat at around 1 million units for the period April‐November 2008 compared with the corresponding period in 2007. Fitch expects the above demand drivers to stabilise over CY09. companies are implementing stringent cost‐ cutting measures such as laying off temporary workers and reducing overtime.

Corporates higher working capital utilisation. (212) 908‐0500. The assignment. to an extent. which includes better credit availability for CV financiers. Whilst most OEMs are currently implementing large‐scale expansion. NY 10004. the suitability of any security for a particular investor. Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. In addition. Fitch is not engaged in the offer or sale of any security. some of the greenfield projects are being scaled down/deferred. or hold any security. Fitch does not audit or verify the truth or accuracy of any such information. One State Street Plaza.000 to US$750. suspended.000 to US$1. guarantors. which is likely only over the medium term. Better credit availability will. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled. which have faced the brunt of the impact of the slowdown. and its subsidiaries. All of the information contained herein is based on information obtained from issuers. As a result. Ratings may be changed. Fitch does not provide investment advice of any sort. Fitch Ratings Ltd.000 (or the applicable currency equivalent) per issue. Copyright © 2009 by Fitch. While this will. underwriters. and long‐term strategic initiatives. however. Reproduction or retransmission in whole or in part is prohibited except by permission. In certain cases. NY. That said. help stem the current volume decline. or the tax‐exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers. Due to the relative efficiency of electronic publishing and distribution. and other sources which Fitch believes to be reliable.Telephone: 1‐800‐753‐4824. Such fees generally vary from US$1. unless such risk is specifically mentioned. whilst the extent of capex will remain large in relation to operating cash flows. Such fees are expected to vary from US$10. or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws. Fax: (212) 480‐4435. insurers. All rights reserved. eg critical capex required for new model launches.. The government has set out a stimulus package for the sector. other obligors. Inc. the size of these investments is likely to be lower than that projected by Fitch in CY08. the Financial Services and Markets Act of 2000 of Great Britain.  Negative Outlook over the Short to Medium Term; Long­  Term Fundamentals Remain  A recovery of the sector remains contingent upon improved credit availability as well as recovery of key demand drivers including GDP growth and the freight markets. Fitch notes that the impact on credit profiles has been more severe for pure‐play CV makers. partly offset the current impact of the slowdown for both cars and CVs. The agency expects the lower growth to translate into higher negative FCF in FY10 than anticipated earlier. 2009 Indian Auto Sector Outlook – More an “L”‐Shaped Recovery January 2009  3  . sell. Ratings are not a recommendation to buy. other obligors. Thus. which will exert additional pressure on operating metrics. Fitch believes that a recovery in freight rates will remain more critical for the CV sector. which could stem the extent of deterioration. increased interest costs.500.000 (or the applicable currency equivalent). or insured or guaranteed by a particular insurer or guarantor. for a single annual fee. publication. bus sales could also benefit from the proposed assistance to be given to state governments under the Jawaharlal Nehru National Urban Renewal Mission. and a reduction in excise duties (which have already been passed on). verified and presented to investors by the issuer and its agents in connection with the sale of the securities. or the securities laws of any particular jurisdiction. The rating does not address the risk of loss due to risks other than credit risk. a substantial part of their expansion is non‐ discretionary in nature. Ratings do not comment on the adequacy of market price. A Fitch rating is an opinion as to the creditworthiness of a security. the information in this report is provided "as is" without any representation or warranty of any kind. and underwriters for rating securities. increased deprecation benefits for CV purchases. and Fitch’s expectation of negative free cash flow (FCF) for the sector. or withdrawn at anytime for any reason in the sole discretion of Fitch. Fitch will rate all or a number of issues issued by a particular issuer.

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