Auto volumes likely to recover partially in H2 FY21: Fitch3 min read . Updated: 24 Jun 2020, 02:10 PM IST
Credit rating agency Fitch has said that the overall auto volumes could decline by more than 20% in the year as customers choose to delay spending on big-ticket discretionary items amid a weak economic outlook.
Auto volumes are expected to recover partly in the second half of the ongoing financial year as sales gradually increase after the easing of lockdown measures since May, Fitch Ratings has said.
It, however, said that the overall volumes could decline by more than 20 per cent in the year as customers choose to delay spending on big-ticket discretionary items amid a weak economic outlook and due to higher prices with BS 6 rollout.
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Automakers reported zero sales volumes in April and more than 75 per cent Y-o-Y decline in May because of weaker demand as well as production disruption owing to plant closures, supply chain disruption and the lack of labour availability, it said.
Fitch expects India's real GDP to decline by 5 per cent in FY21 following multiple extensions of stringent lockdown measures in the country since the last week of March.
"We expect, in particular, a sharper decline in the sales of medium and heavy commercial vehicles because of lower levels of private investment, weak mining activity amid subdued commodity prices and fewer new infrastructure projects," the ratings agency stated.
In comparison, the decline in two-wheeler volumes could be smaller because rural consumers will be less affected by the recession, while they had a good harvest and better pricing dynamics in the last crop season and expect a normal monsoon in the current season.
Better farm economics have supported India's tractor sales, which fell by a smaller 10 per cent in FY20 compared with other vehicle types, it said.
Noting that the weaker sales volume will have a larger impact on automakers' profitability as they have a significant quantum of fixed expenses when compared with operating margins, it said "weak demand could also lead to more aggressive pricing by automakers despite higher cost of production under BS 6, which could offset savings from lower commodity prices."
Automakers will also face significant working capital-related cash flow mismatches in the June quarter of the current financial year, as sales receipts dwindle in line with weak volumes, but they continue to make payments to suppliers - which are typically smaller entities with limited financial flexibility, said the rating agency.
"However, we do not expect the larger automakers to experience major liquidity issues, given their low leverage and ample financial flexibility," it added.
According to Fitch, sales in all key auto categories fell sharply in the March quarter of the previous fiscal from December quarter of the same year, when discounts offered by automakers during the festive season helped to slow the downtrend in sales that started in the beginning of 2019.
Auto sales were affected by weak consumer sentiment as quarterly GDP growth slowed over FY20 and buyers' preference to wait for newer, BS 6 compliant models, it said.
Domestic sales volume of passenger vehicles (PV) declined 22 per cent Y-o-Y in Q4FY20, compared with a decline of 1 per cent in December quarter of the previous fiscal, Fitch Ratings said quotings SIAM data.
Sales volume of commercial vehicles and two wheeled vehicles fell by 48 per cent and 25 per cent, respectively, in the March quarter of 2019-20, sharper than 17 per cent and 15 percent declines in December quarter of the last fiscal, it stated.
At the same time, exports of PVs and two wheelers increased by 0.2 per cent and 7.3 per cent respectively, during FY20, but they could not offset the overall decline in domestic sales, Fitch Ratings said.
This story has been published from a wire agency feed without modifications to the text.