Indian auto firms see no quick end to growth woes

File photo of cars on the assembly line of an automobile plant in Maharashtra, April 2, 2004.

NEW DELHI (Reuters) - The Indian automobile industry faces a bleak outlook this fiscal and the next with falling vehicle sales, high interest costs and raw material prices squeezing margins, industry officials said on Monday.

Data on Monday showed car sales in October declining for the third time in four months, and sales of trucks and buses slumping 36 percent on the year.

Demand has been weak as automobile loans remained dear and scarce as economic activity slowed. The top two truck and bus makers have cut production to avoid inventory build-ups and more could follow suit.

"The outlook is not good. April-September growth was 10 percent. October has been so bad, overall growth has come down to 5 percent," Dilip Chenoy, director general of the Society of Indian Automobile Manufacturers, said.

"We're only the mirror image of what the vehicle manufacturer is," J.S. Chopra, president of the Automotive Component Manufacturers' Association of India (ACMA), said. "If vehicle manufacturers cut back, component manufacturers will also cut back in the same proportion."

Reduced vehicle production means fewer orders for component makers, who would see their inventory costs rising as they have to store the incoming raw materials, Chopra said.

Even exports, a driver for parts manufacturers, are slowing as carmakers worldwide combat the global slowdown. ACMA figures show exports grew 6 percent in the April-Sept, against a 25 percent compounded annual growth in the last five years.

In the April-Oct, car sales rose just 3.5 percent, down from the 11.8 percent in the year to March 2008. Commercial vehicle sales contracted nearly 3 percent in the period, against 4.1 expansion last year.

Credit rating agency CRISIL has forecast the slowdown in the automobile sector to last till 2009/10, with single digit growth in all segments.

SIAM on Monday said it would wait for November sales figures before revisiting the forecast for the year to March 2009. It has already trimmed growth projections once this year, to 8-10 percent from 12-15 percent.

Much of the auto industry's pain stems from a period of tight monetary policy enforced by the Indian central bank, which by July had lofted its key short term interest rate to a seven year high of 9 percent, bumping up rates on vehicle loans.

Auto makers tried to shore up demand by offering incentives to customers before rolling back the sweeteners as rising raw material prices began squeezing margins.

Interest rates have come down since mid-October and input prices have cooled, but analysts say the benefits would take time to flow down and margins would continue to be hurt.