Credit rating agency Fitch Ratings expects Indian automakers' profitability to remain weak as the pandemic's economic impact will weigh on demand in FY21.
India's automakers reported sharper volume declines and weaker profitability in the last quarter of the financial year ended March 31, 2020 (4QFY20) than in the earlier quarter.
The rating agency cited factors such as slowing GDP growth and weak consumer sentiment to have reduced volumes and led to higher discounts by automakers.
Fitch said the implementation of BS 6 - a more stringent emission framework - in April 2020 will increase production costs.
"Sales in all key auto categories fell sharply in 4QFY20 from 3QFY20 when discounts offered by automakers during the festive season helped to slow the downtrend in sales that started in the beginning of 2019," Fitch said in a statement.
"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."
According to the Society of Indian Automobile Manufacturers, domestic sales volume of passenger vehicles fell by 22 per cent YoY in 4QFY20, compared to a decline of 1 per cent in 3QFY20.
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"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 2020," the statement said.
"Automakers reported zero sales volumes in April and year-on-year declines of more than 75 per cent in May because of weaker demand as well as production disruption due to plant closures, supply chain disruption and the lack of labour availability."
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As per the statement, volumes are expected to partly recover in the second half of FY21 as sales gradually increase after the easing of lockdown measures since May.
However, overall volumes could decline by more than 20 per cent in FY21 as customers choose to delay spending on big-ticket discretionary items amid a weak economic outlook and due to higher prices with BS 6.
In particular, Fitch expects 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.
"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," the statement said.
"Better farm economics have supported India's tractor sales, which fell by a smaller 10 per cent in FY20 compared with other vehicle types."
Besides, it said that sales volume will have a larger impact on automakers' profitability as they have a significant quantum of fixed expenses when compared to operating margins.
"Weak demand could also lead to more aggressive pricing by automakers despite the higher cost of production under BS6, which could offset savings from lower commodity prices," the statement said.
"Automakers will also face significant working capital-related cash flow mismatches in 1QFY21, 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. However, we do not expect the larger automakers to experience major liquidity issues, given their low leverage and ample financial flexibility."
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