Indian auto industry takes a decadal step back: ICRA

The ongoing Covid-19 pandemic and the tough economic conditions induced by the three-month-long nationwide lockdown has pushed the Indian auto industry back to the state it had 10 years ago, says a research by the credit rating agency ICRA.

While there has been a sequential month-on-month recovery across segments like passenger vehicles, two-wheelers and tractors, the rating agency believes the overall scenario is far away to reach the pre-covid levels again.

ICRA estimates the Indian auto industry’s sales volumes in segments like passenger vehicle (PV), two-wheeler, light commercial vehicle (LCV), medium and heavy commercial vehicle (MHCV); would contract by 22%-25%, 16%-18%, 17%-20% and 35%-40% respectively in the current financial year. The auto component industry, including tyres, is estimated to contract the sales volume by 14%-18% in the FY21.

According to the rating agency, the Indian GDP is likely to decline by 11% in FY21, tickling down to lower the demand for the automotive industry further. However, the tractor segment is expected to continue its growth momentum.

Headwinds for passenger vehicles

The passenger vehicles segment is marred by the weak economic outlook, which is at a historic low. The segment is expected to record a 22%-25% decline in sales volumes in FY21. While passenger vehicle manufacturers have started operating at their pre-Covid level capacity utilisation during September 2020, focusing on the festive season, the post-festive season is likely to see a drought in demand.

However, on the low base this year, ICRA expects the passenger vehicle segment’s sales volume will witness a stronger double-digit growth of more than 15% in FY22. In that case, the segment will register positive growth after two consecutive years of negative growth at – 17.9% in FY20 and – 22% to – 25% in FY21.

The drop in demand for the carmakers is being reflected in the capacity utilisation, which is likely to fall below 45% in FY21, from 50%-55% in the previous financial year.

ICRA also estimates that the carmakers present in the Indian auto industry would cut their Capex by 35%-40% during FY21-FY22 as there won’t be any capacity expansion in the near future. Instead, the carmakers will invest incrementally on new product development and platform improvisation as well.

On the positive note, the Indian auto 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.

Talking about the expected PV trend in Indian auto industry, Ashish Modani, Vice President, ICRA, said, “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 FY21 which will benefit entry-level cars and SUVs. Buyers may opt for 2Ws or used cars to avoid public transport.”

Modani further added that the share of diesel vehicles is expected to decline below 40% in the next two years. Some auto manufacturers have already exited the diesel portfolio completely.

Luxury cars to witness 40% decline in sales

As ICRA estimates, the luxury car segment would witness a decline of over 40% in the current financial year, despite the sequential month-on-month sales growth in the last few months.

Penetration of luxury cars in the Indian auto industry is the lowest among the large economies, hence providing long-term growth visibility. However, a higher tax on CBUs/CKDs is a key deterrent for the luxury car OEMs as local manufacturing is not lucrative for them due to the low sales volumes in the country.

Automakers focusing on fresh vehicles

To revive the sagging sales, Indian auto industry, especially the carmakers are banking big on the fresh vehicles, including both new models and facelift versions of the existing ones. Around 45 fresh vehicles have been launched in 2020 that coincides with historic zero-sales month, nationwide lockdown, pandemic stricken economy, financial crunch etc.

Out of these 45 vehicles launched, 14 are priced below Rs 10 lakh, as per Jato Dynamics data. In the first nine months of 2020, new launches and facelifts were 35% higher in comparison with 2019, another year saw slumping sales for the Indian auto industry due to the global economic crisis.

Key car launches/facelifts in CY2020

Majority of these new products have set new benchmarks for technologically advanced attributes and value packaging. Some of these changes were regulatory-driven, including emission norms, tax change etc. At least four themes were prominent in the new launches, which are – hybridisation and electrification, in-car convenience, connectivity, driver-assist technologies.

For example, two comparative newcomers in the Indian auto industry, Kia and MG Motors introduced their products like Sonet and Gloster respectively, with several segment-first features. Among others, significant launches of 2020, Maruti Suzuki, Hyundai, Mahindra & Mahindra and Tata Motors have launched the Vitara Brezza facelift, Aura, new Thar and Altorz respectively.

Mass-market car brands like Maruti Suzuki, Hyundai, Toyota, Mahindra & Mahindra, Kia, MG Motors along with some luxury carmakers including Mercedes-Benz, BMW and Jaguar have introduced new models and facelifted versions of their existing portfolios. These new launches are seeking to cash in on the sales during the festive season until mid-November.

Commercial vehicle woe continues

Despite the slow but sequential recovering trend in other segments, the commercial vehicle segment continues to face strong headwinds. Demand growth in the commercial vehicle industry has dropped by 85% in the first quarter of FY21. The nationwide lockdown curtailed the movement of goods, which severely impacted the commercial vehicle segment.

Apart from that, the commercial vehicle segment in Indian auto industry also faces other challenges like global meltdown, financing crunch, lower GDP growth, subdued freight availability, infrastructure issue, overcapacity, mining ban etc. Also, the increased vehicle pricing by 10%-15%, implementation of BS-VI emission norms and revised axle norms have impacted the commercial vehicle sales across the country.

According to ICRA, the revival of the commercial vehicle segment in India depends on the economic recovery and a smoothly operating financing environment. Also, addressing the above-mentioned headwinds will ease the situation for the commercial vehicle segment of the Indian auto industry.

As the rating agency forecasts, growth of the MHCV and bus segment will decline – 35% to – 40% in FY21 and grow by 40%-45% in FY22. The LCVs too would decline by – 17% to – 20% in FY21 and grow by 15%-20% in the next financial year.

Further, ICRA forecasts that the Covid-19 pandemic outbreak will significantly impact the capacity utilisation in the CV segment of the Indian auto industry. The capacity utilisation in the CV industry is expected to decline to 36% in FY21 and rise to 45% in FY22 from 48% in FY20. The rating agency also says that with the present liquidity crunch and weak demand, the auto OEMs are curtailing their CAPEX. The amount is expected to drip to Rs 24 billion in FY21 and 21% in FY22, as compared to Rs 67 billion in FY20.

Upbeat rural sentiment boosting tractor sales

Tractor segment in the Indian auto industry has seen healthy demand, thanks to the upbeat rural economy on the back of the good monsoon. This has helped the farm equipment segment to knock off negative sentiment. ICRA expects the tractor demand will remain healthy in the coming days as well, on the back of the good monsoon, enhanced government focus on procurement, favourable Kharif crop outlook.

The rating agency forecasts single-digit growth in the tractor segment between 7%-9% in FY21. The credit outlook for the tractor segment has been stable, claims ICRA. It also says that despite some margin pressure expectations, the operating margins for most of the tractor manufacturers in the Indian auto industry are likely to remain at moderate to healthy levels.

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