Revival in the auto sector, internal cost control, slashing of high cost inventory and improved purchasing power will help auto component companies offset the severe pressure on the financials in the past 12 months and may even help them improve profitability, control debt and prevent deterioration in their capital structure. These are among the key findings of a recent research by credit rating agency Crisil.

Going forward, Crisil expects the pressure on the credit profiles of component suppliers to ease. This applies specifically to companies that maintain a healthy balance sheet, participate primarily in the growing two-wheeler, passenger car and utility vehicle and light commercial vehicle segments, and are diversified with a reasonable presence in the after-market where demand continues to be stable.

Should some of these trends sustain, they can set the stage for a potential improvement in the credit quality of these suppliers over the medium term, Crisil pointed out.

In recent months, says Crisil, the domestic demand for automobiles?especially two-wheelers, passenger cars and light commercial vehicles?has turned for the better. This growth has positive demand implications for autocomponent suppliers.

The demand for two-wheelers and passenger cars (including UVs) increased 15% and 21%, respectively in the first five months of 2009-10, compared with the corresponding period of 2008-09. The demand for LCVs increased 11% during the first five months of 2009-10 over the corresponding period last year.

Better availability of finance, lower cost of finance, more income in the pockets of a large section of consumers following the implementation of the Sixth Pay Commission recommendation and increased rural penetration have supported the demand growth.

Many auto-component suppliers are also expected to benefit from the decline in input prices. Most component suppliers have also exhausted the high-cost inventory, which had piled up as sales slowed down in the second half of 2008-09. Auto-component suppliers have also implemented several cost reduction measures and are exhibiting greater caution in undertaking capital expenditure programmes.

Conversely, entities with a weak capital structure, narrow product profile, and a greater reliance on the medium and heavy commercial vehicle segment or export markets where demand remains weak, are unlikely to see a significant relief in their credit quality over the near term. Crisil currently has ratings outstanding on 83 auto-component suppliers.