FY21 Auto Volumes To Remain at Decade Low; Full Recovery Likely from 2HFY22: Ind-Ra
Auto sales in domestic market would remain at a decade low level of about 20% to 25%, however due to the weak consumer sentiments and disruptions caused by the coronavirus (COVID-19) pandemic, full recovery would be only from the second half of FY21-22 (H2FY21-22), says a research note.
In the report, India Ratings and Research (Ind-Ra) says it maintained a negative outlook for the auto sector for 2HFY21 on account of continued weak consumer sentiments and macroeconomic headwinds amid COVID-19 led disruptions. "We expect domestic auto volumes to decline 20%-25% year-on-year (y-o-y) in FY20-21, which is marginally better than the earlier forecast of 22%-25% in June 2020," it added.
According to the ratings agency, the change is mainly due to increasing preference for personal mobility and expectation of a stronger demand rebound from rural and semi-urban markets than from urban markets, in particular positive for passenger vehicles (PVs) and two-wheelers (2Ws).
Both PVs and 2W sales could fall 18%-21% yoy in FY21. Decline in commercial vehicle (CV) sales would be 30%-35% y-o-y in FY20-21, on account lower economic activities.
Ind-Ra further expects auto volumes could post double-digit growth (in mid-teens) in FY21-22 primarily due to a lower base over FY20-FY21.
It says, "Lower affordability due to job losses or loss of income would shift consumers’ preference towards lower-end vehicles especially PVs. In 2Ws, motorcycles will continue to outperform scooters as the former derives substantial demand from rural markets."
"CVs and more specifically medium & heavy CVs (MHCVs) would continue to see a muted demand due to lower industrial production and excess capacity in the system, and any demand revival thus is unlikely before fourth quarter (4Q) of FY22. Light commercial vehicles (LCVs) are likely to benefit from increased e-commerce, and last mile transportation particularly for essential commodities," it added.
Ind-Ra says it expects limited rating movements in the sector in H2FY20-21 and, thus, has maintained a stable rating outlook. It says, "We expect revenues to decline 16%-20% yoy during the year with EBITDA margin contracting 100-150bp on lower operating leverage, leading to moderated credit metrics in FY20-21. However, lower leverage and robust liquidity are likely to continue to provide strong financial flexibility."
According to the ratings agency, original equipment manufacturers (OEMs) with greater presence in agriculture-based markets are likely to benefit. Margins and credit metrics of CV and diversified players with a higher proportion of CV sales are likely to be impacted more than players in PV and 2W, it says, adding credit metrics are likely to improve in FY21-22 as profitability starts to normalise, though will not reach FY19-20 levels.
Refinancing risk is low for the industry and there is adequate rating headroom, the agency added.
Ind-Ra says, "The supply-side risks continue to persist, despite unlocking, given the swift spread of COVID-19 in tier-I/ tier-II cities where several plants of original equipment manufacturers and auto ancillaries are located. Further, as capacity utilisation picks up, the issues related to lack of trained manpower, due to reverse migration, could emanate."
"Favourable regulatory changes such as goods and services tax (GST) cuts or incentive based scrappage policy could help demand revival in the medium term. However, any significant spread of the virus to rural India could affect the recovery trend due to further disruptions in those parts of the economy," it concludes.