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June 18, 2018 location Mumbai

For vehicle makers, capex to rise over 30% in next 2 fiscals

Healthy demand prospects and regulations to drive spend; OEM credit profiles to remain stable

Capital expenditure (capex) by automobile original equipment manufacturers (OEMs), comprising commercialvehicles (CVs), passenger vehicles (PVs) and two-wheelers, is set to increase by 30% to ~Rs 58,000 crore overfiscals 2019 and 2020, compared with the preceding two fiscals.


A study of 18 OEMs (of which 10 are rated by CRISIL), covering ~90% of current industry volume indicates PVmakers will account for almost 70% of this capex. This will be supplemented by CV manufacturers with 20% shareand the balance by two-wheeler manufacturers.


The OEM space is largely duopolistic with the top two players in each segment (PVs, CVs and two-wheelers)enjoying ~60-70% market share. The top two players in the PV segment for instance are operating at close tooptimal levels and are even resorting to lowering exports to meet domestic demand. Leading players in othersegments are operating at utilization levels of over 70-75%.


To be sure, the top two players are expected to incur more than half of the total capex in each segment, as theyseek to maintain market share amid healthy demand and tighter regulations.


Anuj Sethi, Senior Director, CRISIL Ratings, said, “About half of the Rs 58,000 crore would be to expandcapacity to cater to growth in demand, and the balance for new products and technology to conform totighter regulations. Vehicle demand is expected to grow in most segments in high single digits till fiscal2020, supported by rising disposable incomes and increasing industrial and rural activity.”


New model launches and investment in product development, including electric vehicles will also be necessitateddue to intense competition. For instance, CRISIL expects around 8 new major model launches in fiscal 2019 inthe PV segment alone, compared with 6 in fiscal 2018. Besides, investments in technology are being made toensure products conform to regulatory changes, including BS-VI emission norms, braking norms and crash tests.


Despite sizeable funding requirements for capex in the next two years, CRISIL expects the credit quality of ratedOEMs to remain stable, going forward, supported by strong cash generating ability, well-maintained balancesheets as well as promoter support.


The ratios of debt / EBITDA (earnings before interest, tax, depreciation and amortisation) for CRISIL rated OEMsfor fiscal 2018 is estimated at around 1 time, and is not expected to deteriorate materially despite the sizeablecapex plans.


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