ICRA expects auto industry growth to pick up only by FY2022

by Shahkar Abidi 14 Oct 2020

The 11 percent projected decline in GDP during FY2021 arising out of general economic slowdown and Covi-19 is expected to lead to lower demand for country’s automotive industry (except tractors). According to the latest report by ICRA, though sequential recovery is evident across all automotive sub-segments; sustainability of demand momentum during festive season is a key factor. The auto component industry (including tyres) whose prospects are tied to the automotive sector is estimated to contract by 14%-18 percent in FY2021

Within the industry, the passenger vehicle (PV) industry is expected to see a 22-25 percent decline in volumes in FY2021. The overall consumer sentiment is currently at historic lows and the recessionary environment has resulted in purchase deferrals. While the industry was hit hard in Q1 FY2021, most PV and two-wheeler OEMs started operating at pre-covid19 level capacity utilisation during September (inventory re-stocking at dealership also supported wholesale dispatched during September).

PVs likely to clock double digit growth in FY2022
ICRA in its research note expects the PV industry volume to witness strong double-digit growth (>15 percent) in FY2022. This will be after two consecutive years of likely negative growth at (-17.9 percent) in FY2020 and (-22 to -25 percent) in FY2021. The fall in demand is also being reflected in capacity utilisation which is likely to dip below 45 percent in FY2021, from 50-55 percent in FY2020. 

The rating agency expects capex cut by 35-40% during FY2021-FY2022, and incremental investments will be primarily towards new product development and platform improvisation. On the positives the industry’s long-term drivers are intact but compared to the Chinese and other key global markets, the domestic market is witnessing a slower paced recovery.

Commenting on the expected PV trend, Ashish Modani, Vice President, ICRA says, “There is an increased risk aversion in retail as well as wholesale financing, which is a deterrent. The rural market will be the key driver of volume in FY2021 which will benefit entry level cars and UV. Buyers may opt for two-wheeler or used cars to avoid public transport. The share of diesel vehicles is expected to decline below 40 percent in UVs in the next two years and some manufacturers have already exited the diesel portfolio completely. The luxury car segment will witness a decline of over 40 percent in current financial year. Its penetration in India is the lowest amongst large economies thereby providing long term growth visibility. However, a higher tax on CBUs/CKDs is a key deterrent for luxury car OEMs as local manufacturing is not lucrative due to low volumes.”

CV continues to face headwinds
According to ICRA, demand growth in the commercial vehicles industry fell by 85 percent in Q1 FY2021, severely impacted by extended lockdown across the country which curtailed movement of goods. Other than this the segment continues to face several challenges due to overcapacity, global meltdown, financing issues, lower GDP growth and subdued freight availability, mining ban and infra issues; increased vehicle prices (by 10-15 percent) with implementation of BS VI besides revised axle norms amongst others. Revival depends on economic recovery and a benign financing environment; in addition, addressing the aforementioned challenges will also matter.

ICRA’s analysis shows that although CV retail sales are reviving, it remains a far cry from pre-covid19 levels. As against a monthly sale of 80,000+ units reported prior to the pandemic, CV retail sales trended at less than 40,000 units in September 2020, even after four months of sequential improvement.

As for the outlook, the M&HCVs and buses segment growth will decline to (-35 to -40 percent) in FY2021 and will grow by 40-45 percent in FY2022 while LCVs will witness a slower decline of (-17 to -20 percent) and grow by 15-20 percent during the period. The FY2021 outlook is contingent on recovery in macro and infra activity; the pandemic too poses significant downside risks. ICRA expects the negative operating leverage to significantly pressurize margins in FY2021; the same may fall to 2.1 percent in FY2021 from 2.6 percent in FY2020 before rising to 5.3 percent in FY2022. The pandemic outbreak will significantly impact capacity utilisation levels of the CV industry.

Tractor’s growth revised to 7-9 percent in FY2021
As far as tractors are concerned, ICRA had earlier forecasted of 2-4 percent growth in domestic tractor volumes in FY2021, led by uncertainty regarding the impact of the pandemic on the farming community. While uncertainty continues to exist in relation to pandemic, farm sentiments are expected to remain healthy, aided by enhancement government focus on procurement, healthy monsoon precipitation and a resulting favourable Kharif crop outlook. Accordingly, ICRA has revised its growth estimates to 7-9 percent in FY2021 with downside risk emanating from spells of unfavourable rainfall leading to crop damage and supply chain disruption if any.

Auto components volumes pushed back by 10 years
The auto ancillary sector which has registered a sharp decline in revenues of over 60 percent during Q1 FY2021is expected to decline by 5-7 percent year-on-year during Q2FY2021 though there will be a strong sequential pickup. Industry wide revenues are expected to contract by 14-18 percent during FY2021. The tyre manufacturers are expected to perform better, with revenue decline likely in the high single digit.

Commodity prices which have stayed accommodative in H1FY2021 are expected to increase in H2FY2021 and will adversely impact margins in the auto component industry.

Pavethra Ponniah, VP and Sector Head on the prospects of the auto component industry said, “Q2FY2021 will witness sharp sequential recovery but is likely to post a 5-7 percent YoY revenue decline. On the whole, industry wide revenues are expected to contract by 14 - 18 percent in FY2021. Demand from OEMs is estimated to fall by 19-20 percent and replacement demand by 10-15 percent. Further, global automotive markets are expected to contract by over 20 percent thereby impacting exports. However, the liquidity pressure witnessed in Q1 FY2021 has eased with pickup in volumes over the past two months with the sharp pick up in OEM demand. ICRA expects strong revival in FY2022 with the auto component industry likely to register revenue growth of 18-20 percent.”


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