ICRA sees near-term headwinds for India Auto Inc, maintains cautious outlook

Ratings agency ICRA has maintained a cautious growth outlook on the Indian automobile industry as a result of the continued slowdown, BS VI transition, muted demand and tight financing.

For the first 8 months of the ongoing fiscal year, overall industry sales are down nearly 16% to 15,705,447 with the critical commercial vehicle segment bearing the brunt of the slowed-down economy the most, at 22% and the medium and heavy commercial vehicle sub-segment down 37%.  Here's looking at a segment-wise analysis by ICRA.

Two-wheeler volumes may keep contracting
ICRA expects two-wheeler volumes to contract by 8-10% in FY2020, with some moderation in decline in H2. Amidst subdued demand and high cost of manufacturing of BS VI products, the operating margins of two-wheeler OEMs are expected to moderate marginally from current levels. Nonetheless, the credit profiles are expected to remain strong, supported by healthy accruals and financial. The OEMs are expected to continue to invest towards new product development, technologies (like electrification) and enhancement of domestic and overseas sales network.

Domestic two-wheeler volumes declined by 15.7% on a year-on-year basis in the April-November 2019 period as consumer sentiment remained subdued. This is seen as a cumulative impact of higher cost of vehicle ownership due to regulatory changes like insurance premium hikes and ABS to CBS transition coupled with rising fuel costs and stretched liquidity.

Weak rural sentiment (primarily affecting entry level motorcycles) due to a poor rabi crop season in FY2019 got exacerbated by a delayed and uneven monsoon in FY2020. This may impact the kharif crop output and farm incomes going forward too. Moreover, uncertainty around income growth affected the consumer sentiments in urban centres. With weak retail offtake, a few OEMs undertook unscheduled factory shutdowns to prevent inventory piling up. The festive season provided only a temporary respite despite the discounts offered by the OEMs.

CVs to continue facing headwinds
For CVs, the headwinds may continue over the near-term with the likelihood of limited pre-buying ahead of BS VI rollout exerting pressures on earnings and overall credit profile of CV OEMs. ICRA claims that although vehicle prices are expected to increase by approximately 10-12% (following implementation of BS VI norms from April 2020), the likelihood of pre-buying has diminished in the current macroeconomic scenario.

The slowdown in infrastructure investments and the prolonged weakening in consumption trends pose additional challenges. The M&HCV (Truck) segment, which acts as a benchmark for the economy, has seen volumes contracting by a sharp 41% in YTD FY2020. The report specified that: “Accordingly, with cash flows of fleet operators under pressure due to afore-mentioned factors, replacement demand for new trucks is likely to remain muted till any meaningful pickup in the economy and infrastructure projects fructify.”

However, on December 31, 2019 Finance Minister Nirmala Sitharaman unveiled a massive Rs 102 lakh crore infrastructure development pipeline (NIP). This includes Rs 20 lakh crore investment in the road sector. This could offer some respite to the beleagured CV OEMs over the next few years. 

PV segment growth to be slow
ICRA remains cautiously optimistic on the passenger vehicle industry's growth. Though retail demand has seen some traction in the past couple of months, as a result of discounts as high as 15%, the overall recovery is likely to be gradual and at a slow pace. After the steep 18% decline in wholesale despatches YTD FY2020, the overall wholesale volume is expected to shrink by 14-16% in the current fiscal. The second half though is expected to be much better than the first half. The low base of H1 FY2020, especially Q2, will optically improve the growth rate for the next fiscal (FY2021) but industry volumes are unlikely to surpass FY2019 volumes (3,377,436).

Tractor volumes could slip
Overall, ICRA expects tractor volumes to contact by 7-9% in FY2020, with a moderation in decline in H2 FY2020. In H1, FY2020, the domestic industry volumes declined by 12.2% YoY. The credit profiles are expected to remain healthy, even as OEMs continue to invest towards new product developments, enhancement of sales network and technology up gradation related to BSVI emission norms.

Auto components sector to go slow on capex
ICRA foresees 15% capex deferment by the Indian auto component industry during FY2020. The aftermarket demand for components accounts for 18% of the industry turnover. Capex in the Indian auto component industry (ex-tyres and battery) has been high over the past five years, hitting 7.4% of revenues during FY2019. These went into building capacities to meet the burgeoning demand until FY2019 and to meet several mandatory technological changes on safety and emission. Maintenance capex of about 2-3% of revenues has also been pruned down. Overall capex is expected to revive after FY2021.

Also read: CV industry gets a boost, Centre announces Rs 20 lakh crore investment for roads