Latest Car News in India

Tuesday, July 31, 2012

By Shilpa Chopra

ICRA’s places ratings of 14 auto component manufacturers after Manesar plant violence

ICRA has placed the ratings of 14 auto component manufacturers on “Rating Watch with Developing Implications” which have high business dependence on Maruti Suzuki India Limited (MSIL) and are likely to be affected by the production disruption at the Manesar (Haryana) plant. This is in view of the ongoing lockout at the Manesar plant of MSIL, declared after violence broke out between the workers and management, disrupting production output of vendors supplying to this plant. Given the present uncertainty, it is difficult as of now to quantify the extent of supply disruption and its eventual impact on individual companies’ financial risk profile. However, ICRA is monitoring the situation and would conclude its rating action as and when greater clarity emerges.

Maruti Swift Pictures

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It is to be mentioned here that on July 18, 2012, vehicle production at MSIL’s plant located at Manesar got disrupted after violence broke out between the workers and management of the plant. The OEM has declared a lockout of the affected plant for the time being that has halted production output of the following four models – Maruti Swift, Maruti Swift DZire, Maruti A Star and Maruti SX4. These four models together account for around 30-35% of MSIL’s total production volumes. For suppliers, the overall average realization of components related to these four models is higher than those of components that go in models produced at MSIL’s Gurgaon (Haryana) plant. Accordingly, it is estimated that those vendors that supply to all models of MSIL, derive around 35-40% of their revenues from supplies to models produced at MSIL’s Manesar plant.

Maruti Swift Dzire Pictures

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In the above context, several ICRA-rated auto ancillaries that have a high revenue dependence on MSIL’s Manesar plant may experience lower cash accruals and in some cases possible stress on their liquidity position during the period of lockout, prompting ICRA to place their ratings under “Rating Watch with Developing Implications”.

Maruti A-Star Photo

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Being the largest passenger vehicle OEM in India with domestic market share of 38.4% in 2011-12 (45.3% in 2010-11)1, any demand or supply shock on its output, tends to have a relatively greater adverse impact across its supply chain. Even during 2011-12, when production had remained intermittently disrupted at both the manufacturing facilities (Manesar and Gurgaon) of MSIL, some of the auto component manufacturers - particularly those deriving a large majority of their revenues and profits from sales to MSIL - had experienced lower profits and cash accruals during the period of strike.

Maruti SX4 Picture

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