It’s Amber Light For Motown As Demand Unlikely To Revive In FY21, Says Report

It is set to be a long haul for the auto sector that has already been riding through its worst slump in two decades, with demand, that has so far plunged 16 percent, unlikely to pick up even next year, according to a report.

The 3 million-plus-units domestic auto industry has seen volume plunging over 16 percent as of December-end 2019, with some of the segments performing even worse. Despite the nearly two-year crisis, the past two Union Budgets have given little respite to the sector that is very critical to generate employment. Instead, lakhs of jobs have already been lost in the industry, including its allied segments, for the past 18 months or so.

Expecting very low pick-up in volumes given the lingering growth pangs of the overall economy and other macroeconomic headwinds, India Ratings has revised downwards its outlook on the sector to negative for 2020-21 from stable, as it expects "flat-to-low pick up in volume in FY21".

Amid the weak consumer sentiment and an uncertain regulatory environment, including for the e-mobility push, limited credit availability and increased cost of ownership after BS-VI implementation from April will add to the already negative consumer sentiment which would see a flat-to-low single-digit volume growth in 2020-21.

The agency pegs passenger vehicle demand growing 2-4 percent in 2020-21 over 2019-20, but commercial vehicles will continue to see falling demand to the tune of 5-7 percent and the two-wheeler segment will decline 0-5 percent. This is on top of the steep decline in sales volume during the April-December 2019 period of the ongoing fiscal when demand plummeted a full 16 percent year-on-year.

CVs have been hit much harder with over 35 percent drop in sales. The report sees more fall in volumes, with the "industry closing the current fiscal losing 12-15 percent of the market" from the previous fiscal when it had clocked over 3.3 million units.

But it expects limited rating movements in the sector in FY21 and thus has maintained a stable rating outlook. Revenue growth and margins will be subdued, and companies will continue to incur Capex in view of the ongoing regulatory changes, development of EV platform and the continued investment in new products.

However, credit ratings of most original equipment manufacturers are likely to be unaffected due to their robust liquidity positions and low-leverage profiles that provide them strong financial flexibility, it notes. After the adoption of BS-VI from April 1, vehicle prices will go up by a low of 5 percent for cars and a high of 12-15 percent for two-wheelers and others.

Despite this, there is unlikely to be any meaningful pre-buying as automakers have already started launching their BS-VI variants and lowered the production of BS-IV models to manage inventory pile-up. FY21 will continue to face headwinds as consumers will take some time to accept the increased pricing, thus demand in Q1 of FY21 is likely to be minuscule, especially for CVs. The demand is likely to pick up only from the festive season.

In CVs, new axle load norms, low industrial output and a reduction in transit time after Goods and Servies Tax implementation have resulted in excess capacity. While infrastructure spending could increase in FY21, this would consume only some of the spare capacities in the system and thus is unlikely to create incremental demand, the report concludes.