OREANDA-NEWS. Fitch Ratings says Indonesian automotive distributors with high leverage are vulnerable to persistently weak automotive sales. Soft demand for cars and motorcycles often results in a longer inventory turnover, lower sales, and thinner operating EBITDA margins. Those firms that depend on external funding for their working capital are more vulnerable due to higher financing costs and narrower margins in the distribution business.

New car and motorcycle sales were reported by the industry association at 443,181 and 2,599,448, respectively, in the first five months of 2015, down by 17% and 25% year-on-year, respectively. Consumer purchasing power has been eroded by a slowdown in economic growth, high inflation and interest rates, as well as a depreciating rupiah. Domestic economic growth was reported low at 4.7% year-on-year in 1Q15, on account of weak exports, falling commodity prices, high interest rates and a weak currency. Gross profit margins are also being squeezed by the higher import costs of components - on account of the weakening rupiah.

At the same time, Bank Indonesia has announced its plan to ease the loan-to-value (LTV) ratio for vehicle ownership as soon as this month. About 65%-70% of car sales, and up to 85% of motorcycle buyers, use some kind of financing scheme. Fitch expects these more relaxed requirements could help support automotive sales in 2H15, though we do not expect a significant jump in sales for the rest of the year.

For example, PT Mitra Pinasthika Mustika Tbk (MPM, BB-/Stable), Honda's master motorcycle distributor in East Java and East Nusa Tenggara, is likely to encounter pressure in its sales and margins. Nonetheless, Fitch believes MPM has the headroom to absorb a temporary weakness in motorcycle demand; sufficient liquidity buffers and well-spread debt maturity profiles mitigate the risk. MPM's other higher-margin businesses in the oil lubricants and rental services should also provide some buffer to cushion against the cyclicality in the volatile auto retail market.