Capital expenditure (CapEx) by automobile original equipment manufacturers (OEMs), comprising commercial vehicles (CVs), passenger vehicles (PVs) and two-wheelers, is set to increase by 30% to ~Rs 58,000 crore over fiscals 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 PV makers will account for almost 70% of this CapEx. This will be supplemented by CV manufacturers with 20% share and 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 to optimal levels and are even resorting to lowering exports to meet domestic demand. Leading players in other segments 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 they seek 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 expand capacity to cater to growth in demand, and the balance for new products and technology to conform to tighter regulations. Vehicle demand is expected to grow in most segments in high single digits till fiscal 2020, 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 necessitated due to intense competition. For instance, CRISIL expects around 8 new major model launches in fiscal 2019 in the PV segment alone, compared with 6 in fiscal 2018. Besides, investments in technology are being made to ensure 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 rated OEMs to remain stable, going forward, supported by strong cash generating ability, well-maintained balance sheets as well as promoter support.
The ratios of debt / EBITDA (earnings before interest, tax, depreciation and amortisation) for CRISIL rated OEMs for fiscal 2018 is estimated at around 1 time, and is not expected to deteriorate materially despite the sizeable capex plans.