With faster rates of model churn and increasing costs of product design anddevelopment, a consequent reduction in operating margins to currentlyprevalent global levels appears likely. The effect of these factors on thefinancial risk profile of passenger car manufacturers is expected to beaccentuated by the likely intensification of the ongoing market sharebattles. This is hastened by the filtering-in of the impact of the cominginto effect of WTO decontrol requirements. Given these issues, Crisilexpects the standalone credit risk of all passenger car manufacturers to beunder pressure in the short to medium term.

However, the overall credit-worthiness of many passenger car manufacturersis likely to benefit from their parentage. Crisil has rated companies withstrong parental commitment to their Indian ventures like Ford (S&P ratingA), Toyota (S&P rating AAA) and Honda (S&P rating A) as strong creditprotection measures.

Korean car ventures like Hyundai and Daewoo would, however, be constrainedby the low speculative grade ratings of their parent companies - Hyundai(S&P rating BB-), Daewoo (S&P rating D).

The ratings of multiple parent entities like Maruti Udyog Ltd would dependmaterially on the satisfactory resolution of the parentage and relatedmanagement control issues. Crisil'S outstanding ratings in the passenger carindustry include Ford India Ltd (AAA (so) ), Telco which is predominantly acommercial vehicle manufacturer (AA+) and PAL-Peugeot(D).

The Indian passenger car industry is currently witnessing a slowdown infiscal 2000-01, with volumes likely to grow by less than 5 per cent. Thishas had a sobering effect on the industry, which witnessed an unprecedentedvolume growth of about 50 per cent in the year 1999-2000.

The surge was particularly due to the combined effect of a significant salespush by the new entrants, in an attempt to gain market share, the release ofpent-up demand built over previous three years in anticipation of newproduct launches and the pulling-ahead of demand due to anticipated pricerevisions in April 2001.

The Crisil report attributes the slowdown to various factors like theimposition of the uniform sales tax regime, product price escalation due tothe new pollution control measures coming into force and a pull-back postthe demand surge of 1999-2000.

This has particularly affected Maruti, which has primarily been impacted byvolume decline of almost 30 per cent in the economy segment - where it hasenjoyed the strongest competitive advantage. Maruti's share has dropped toabout 55 per cent in the first seven months of the fiscal year 2001, ascompared to about 66 per cent in the corresponding period of the previousyear. To add to its woes, Maruti is facing problems on the production front(due to the ongoing employee dissatisfaction) and on the marketing front, asit is faced with the novel situation of aggressive new entrants withcontemporary product offerings, analysts said.

According to Crisil analyst Arun Panicker, "A quick resolution of thedisinvestment issue will be better for the company's interests."Another interesting offshoot of the study is that the Indian car buyer iscurrently showing a preference for contemporary technology over price.This is especially true in view of the relatively small price differencebetween the economy and the mid-size segment, which can be bridged by thewidely-available financing options.