Domestic auto suppliers, who had embarked on leveraged acquisitions to augment capacities, have been exposed to a significant liquidity crunch due to the global slowdown and this has taken a toll on their finances, according to Fitch.

The agency believes that the impact from auto industry performance in the domestic market could also have an over-reaching impact on the credit profiles of most component manufacturers in India.

According to the rating agency, the revenues of Indian auto suppliers could be impacted by the Chapter 11 filing by leading automakers, Chrysler and General Motors. Also, with a large number of global auto suppliers also under bankruptcy, it has resulted in decline in revenue of the country’s auto component manufacturers. Hence, there is concern about the prospects for recovery in the auto components sector in the short-term and Fitch continues to maintain a negative outlook on the industry.

However, the operations of Indian subsidiaries of global auto suppliers may not be affected as these have been kept out of the reorganisation process, Fitch added.

Consequently, while the sector has witnessed cutbacks in capex plans, the non-discretionary capex to support new launches of the original equipment manufacturers and technology upgrades is likely to continue, it says.

Furthermore, the reduction in export revenues along with depreciation of the rupee against the US dollar and the yen has led to increased net outflows in servicing foreign currency debt and trade commitments.

Another concern highlighted by Fitch concerned the deteriorating working capital situation as a consequence of higher inventories and stretched receivables. The working capital pressures have started to ease with the clearing-off of inventories and improvement in liquidity support from banks and market instruments. Fitch believes that the level of production activity in the auto components industry is essentially going to be guided by the pace of revival in end-consumer sentiment.

Fitch notes that cumulative sales of passenger and commercial vehicles remained sluggish during the first half of 2009, though the situation has improved from the levels during July-December 2008. The marginal growth in passenger vehicle sales during 2009 was derived from the semi-urban and rural areas of the country, where spending power is primarily dependent on the monsoon. However, as there are concerns about delays in monsoon and its subsequent impact on agricultural production, it may impact demand for automobiles, Fitch says.