India Ratings and Research downgrades the industry’s rating, expecting weak sales amid macroeconomic headwinds, leading to weak consumer sentiments.
04 Feb 2020 | 4768 Views | By Shahkar Abidi
While the Indian automotive industry began Tuesday morning with the kick-starting of the Auto Expo 2020, ratings agency India Ratings and Research has revised its outlook on the auto sector to negative for FY2021 from stable to negative, expecting weak sales amid macroeconomic headwinds, leading to weak consumer sentiments.
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While the Indian automotive industry began Tuesday morning with the kick-starting of the Auto Expo 2020, ratings agency India Ratings and Research has revised its outlook on the auto sector to negative for FY2021 from stable to negative, expecting weak sales amid macroeconomic headwinds, leading to weak consumer sentiments.
Furthermore, sector-specific factors such as an uncertain regulatory environment, limited credit availability and increased cost of ownership after Bharat Stage (BS) VI implementation will add to negative consumer sentiments. The agency expects flat-to-low single-digit growth in the total domestic sales volumes in FY2021.
The ratings agency expects passenger vehicle (PV) sales to grow 2%-4% YoY, while commercial vehicles (CV) will decline by at 5%-7% YoY and the two-wheeler (2W) down between 0%-5% YoY in FY2021. During April-December 2019, sales volumes fell 16% YoY. India Ratings and Research expects industry volumes in FY2020 to decline by 12%-15% YoY.
As per the outlook, the revenue growth and margins will be subdued, and companies will continue to incur capex in view of the ongoing regulatory changes, development of an electric vehicle platform and continued new product launches. However, the credit ratings of most original equipment manufacturers (OEMs) rated by India Ratings and Research are likely to be unaffected due to their robust liquidity positions and low-leverage profiles that provide them strong financial flexibility.
After the adoption of BS VI norms from 1 April 2020, the prices of vehicles would increase. However, India Ratings and Research does not expect any meaningful pre-buying as OEMs have already started launching their BS VI variants and reduced production of BS IV variants, to manage inventory pile-up. "Pre-buying is likely to be more in 2W and CV, where price differential is higher, while it would be insignificant in PVs" the agency said.
India Ratings claims that as consumers would take some time to accept the increased pricing, India Ratings and Research believes sales in the first quarter of FY2021 would be minuscule, especially in CVs. The demand is likely to pick up from the start of the festive season in the second half of FY2021.
In CVs, the implementation of axle load norms, low industrial output, and a reduction in transit time after GST implementation have resulted in excess capacity in the system. While infrastructure spending could increase in FY2021, this would consume some of the spare capacities in the system and thus is unlikely to create an incremental demand of vehicles. Furthermore, limited credit availability particularly from NBFCs would contain CV growth in FY2021.