ICRA: COVID-19 Put Brakes On PV Sector Recovery Prospects

The domestic passenger vehicle (PV) industry’s performance in FY2021 is likely to be severely jolted due to Covid-19 impact on Indian economy as well as on consumers’ confidence. As per ICRA’s Research Report, the lockdown will put financial stress on consumer’s income level and will result in deferral of non-discretionary items like PVs. This is likely to delay industry’s recovery prospects by about 6-8 months. The overall wholesale dispatches will decline by 10-12% in FY2021. Recovery in rural income and improvement in overall economic activity will remain crucial to have any meaningful improvement in retail demand off-take. Given the nationwide lockdown and consequent fallout on economic activity, the ratings agency has already revised India’s GDP growth estimate to ±1%.

Commenting further, Ashish Modani, Vice President, Co-Head, Corporate Ratings, ICRA Limited says, “The domestic passenger vehicle (PV) industry is witnessing a demand slowdown for the last 4-6 quarters due to factors like economic slowdown, tighter financing environment and inventory de-stocking at dealerships; this has affected wholesale despatches. As a result, industry wholesale volumes declined by 17.9% during FY2020. Earlier, we had expected gradual recovery to happen from Q4FY2021 onwards, driven by favourable rabi output as well as likely pickup in economy. PV purchase being a discretionary item, improvement in consumer sentiments and overall growth uptick in economy is crucial to have any meaningful recovery in the industry. However, the covid-19 outbreak has further drastically altered the landscape in the last two months and domestic economy is expected to witness significant shock during Q1 FY2021 due to nationwide lockdown.”

   Exhibit 1: Growth across various segments

Source: ICRA research, SIAM; **: Oct-2019 to Feb-2020

The above Exhibit 1 indicates that for FY2020, wholesale dispatches declined by steep 17.9%, though the pace of contraction has moderated substantially from H1FY2020 level. Nationwide lockdown has resulted in sharp decline in despatches during Mar-2020, thereby pulling down full year growth rate. The primary reason for decline in car sales include 1) tighter financing for consumer as well as dealerships, 2) slowdown in economy which impact consumer sentiments, 3) weak farm income and 4) deferral in car purchase decision in anticipation of large discounts (ahead of BS VI or GST revision). The share of diesel vehicle in overall domestic PV sales fell below 30% level during FY2020.

Economic slowdown and covid-19 lockdown will increase delinquencies by 50-100 in the near-term (next 1-2 quarters) though; it will still be at comfortable level as compared to other automobile asset class like 2W, CV or tractors. Currently, delinquencies vary across financiers, with NBFCs having much higher delinquencies as compared to public sector banks (PSB) and private banks (PVB). While RBI has announced some relaxation in loan repayment obligation post the outbreak, the shock on consumers’ income / investment profile will result in weakening of vehicle asset class. Amongst all borrower segment, taxi segment and self-employed will be adversely impacted due to lockdown impact.

ICRA has a Negative outlook on the PV sector given the adverse impact; and the credit profile of industry participants - automotive suppliers, PV OEMs as well as dealerships will weaken further in the near term. Retail demand will be weak over the next two quarters and the recovery is likely to be slow and gradual. This implies players’ profitability will continue to witness pressure over the next two quarters. 

Prior to the lockdown, there was less than two weeks BS IV inventory, around mid-March 2020 which was expected to be liquidated by end-March 2020. The Hon Supreme Court has given more time to liquidate 10% BS IV inventory, but no meaningful liquidity comfort as well as to the credit profile for the dealerships is expected. At the same time, the stress in PV dealerships regarding BS IV inventory is relatively lower than that of CVs and 2W.

ICRA says that notwithstanding favourable commodity prices, negative operating leverage and high discounts have impacted the credit metrics for PV OEMs, their dealers as well as their vendors. This comes amidst rapid and mandatory technological advancements in vehicle safety and emissions, which has led to sizable capital expenditure by PV OEMs and their vendors over the past few years. Moreover, debt funded dealership modernisation has also taken toll on dealerships capital structure and net profitability. However, the credit profile of subsidiary of international OEMs is primarily supported by strong parentage who considering long-term growth potential of Indian PV market, continue to provide operational as well as financial support.

The market share in the domestic PV segment is expected to remain concentrated over the medium term, with the top five players constituting over 80% of the overall market. This implies that profitability pressures on the relatively low volume players may be even higher, resulting in sustained dependence on external financing to fund losses and capital expenditure requirements. Credit profile of PV dealerships, especially of OEMs having weak domestic market share or leveraged dealerships are likely to witness further strain on credit profile. High rental expense and negative operating leverage impacts their profitability and coverage indicators, and such dealerships may require some hand-holding and financial support from their principal OEMs to tide over short term liquidity pressure.

“In the next 2-3 quarters, ICRA expects that retail demand during Q1 FY2021 will remain significantly weak, with some signs of recovery likely towards festive season. The diesel demand will witness sharper decline, post transition from BS IV to BS VI due to widening cost differential and narrowing fuel price gap. If there is above normal rainfall and healthy reservoir levels, which are a positive for rabi output, rural income should witness recovery post-rabi harvest. The PV industry outlook is negative. There are significant short-term and long-term challenges. In the short-term, covid-19 lockdown will directly impact retail demand; consumer spending -power will also get curtailed. The OEMs will be stuck with BS IV inventory; and delinquencies will increase in the near-term bracket. In the long-term, industry will need to make significant investment over next ten years to comply with emission norms, safety norms and technological advancement (like electric vehicle, autonomous vehicle). Poor road infrastructure, traffic and parking congestion; and high taxation level as compared to developed countries will influence demand. Also, competition from cab aggregators and taxi operators will have some bearing on overall volume off-take, especially for additional car buyers. The long-term strengths / positives for the industry however remain. These are rising disposable income and low car penetration level, financing penetration in India at par with developed market; and poor public transport infrastructure support PV and 2W penetration, though poor road infrastructure remains a constrain,” Modani added.