India Ratings Revises Auto Outlook ‘Stable-To-Negative’ In Second Half of FY20
Traffic travels on the Western Express Highway in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

India Ratings Revises Auto Outlook ‘Stable-To-Negative’ In Second Half of FY20


The rating agency India Ratings and Research on Monday revised its outlook on the auto sector to ‘stable-to-negative’ from ‘stable’ for the the remaining half of the current fiscal.

However, credit metrics of auto original equipment manufacturers are expected to remain resilient in the October-March period of fiscal year 2020, albeit at lower levels than those observed over the last five fiscals, India Ratings said in a release.

The outlook revision reflects India Ratings expectation of negative volume growth in the industry amid weak urban and rural consumption coupled with limited credit availability and the rising cost of ownership, it said.

It expects high, single-digit volume de-growth in 8-9 percent range year-on-year in total domestic volumes in FY20.

While the agency expects flat growth for passenger vehicle and two wheeler volumes in the second half of FY20, commercial vehicle revival will take longer with continued negative growth in second half as well, it said.

According to the agency, though volumes degrew sharply in the April-September period of the fiscal, the second half of the year will see flat-to-low single-digit growth, supported by the festive season and pre-buying due to the likely price rise from April 2020 following implementation of BS-VI emission norms.

However, the overall vehicle growth for FY20 is likely to be subdued, it said.

Till August this year, the sector registered de-growth of 16 percent over the period year ago in domestic sales volumes with negative growth in all sub-segments, the agency said.

Such sharp de-growth in OEMs dispatches has also partly been due to the efforts taken by the industry to reduce dealer inventory, which has been piling-up since the subdued festive sales last year.

India Ratings expects the second half of the year to be better than first-half as inventory levels, to a large extent, should normalise by end-October 2019.

Moreover, the festive season in October quarter and the expected pre-buying during the last quarter of the fiscal is likely to drive retail demand, it said.

According to the agency, the Earnings before interest, tax, depreciation and amortisation margins and leverage of auto OEM sector are likely to moderate in FY20 due to weak volumes and the heavy discounts being offered to promote sales.

The likelihood that the sector will continue spending on research and development, new product development, technological advancements and efforts to meet evolving regulatory requirements will also moderate margins and leverage, it added.

Meanwhile, the rating agency has also revised outlook on the auto ancillary sector to negative from stable for FY20 based on the expectations of weak demand from OEMs.

The 16 percent degrowth in the April-August months over the year-ago period in domestic sales volumes has also impacted auto ancillary companies, with even large players announcing a cut in production days in year-to-date FY20, India Ratings said.

For auto ancillary companies, the weak demand from OEMs is likely to be partly mitigated by continued moderate replacement demand, albeit at lower year-on-year levels, and a likely rise in content per vehicle because of evolving regulatory norms, the rating agency said.

Based on these factors, India Ratings expects the revenues of players to register low single digit growth YoY in the current fiscal.

Most auto ancillaries entered FY20 after a period of elevated capex spending, it said, adding that it believes the weakness in demand and delays in ramp-up of capacities would lead to higher operating leverage, which would adversely affect the profitability margins of companies.

The auto ancillary sector is likely to witness deferment of expansionary capex in FY20, however, cash flows and net leverage ratio would deteriorate because of lower operating profitability and continuing, albeit lower, debt- funded capex for meeting regulatory requirements as well as for the committed capacities, India Ratings said.

Also read: BQ Survey | Discounts Bump Up Auto Sales Near September-End

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