Raging Pandemic Likely To Decelerate Recovery Momentum Of Domestic Automotive Industry: ICRA

The domestic automotive industry was poised for recovery in the current fiscal after witnessing two challenging years in FY2020 and FY2021 on account of the domestic industry slowdown and pandemic-induced challenges respectively. The trends, in fact, had been quite encouraging from the second half of FY2021 onwards, with various automotive segments reporting healthy sequential recovery, post relaxation of the lockdown-related restrictions.

However, the sudden and severe onset of the second wave of the pandemic in the country has derailed the recovery momentum of automobile Original Equipment Manufacturers (OEMs) and auto-ancillaries to an extent. Not only have many auto OEMs and auto ancillaries resorted to plantingRaging pandemic likely to decelerate recovery momentum of domestic automotive industry  shutdowns as a restrictive measure, but also automotive dealerships across regions have not been operational in light of regional restrictions imposed by various states and local authorities in order to curb the pandemic. As per an ICRA note, while these would cause near-term supply disruptions in the sector, the larger and prolonged impact is likely to be on account of the impact on various demand drivers. Accordingly, the ratings agency has revised the growth estimates for most of the different automotive segments downwards.

According to Mr. Shamsher Dewan, Vice President & Group Head, ICRA Ratings, “The second wave of the pandemic, the intensity of which has taken the entire country by surprise, is expected to impact near-term automobile purchases, across segments. Unlike the first wave, where infections were largely localized to urban clusters, the second wave has seen deeper and wider penetration, including into rural hinterlands. Additionally, the significant medical spends have eroded the purchasing power of individuals and families to a greater extent, which would impact large ticket discretionary purchases like vehicles, at least over the near term.”

Within the different industry segments, the two-wheeler segment is expected to be the most impacted, with the target consumer segment’s affordability and demand sentiment sharply hit  by the second wave. Accordingly, domestic two-wheeler volumes in FY2022 are expected to grow by 10-12% now as against 16-18% earlier. The domestic passenger vehicle (PV) segment would also see a softening of demand due to the spread of pandemic to hinterlands, hit on disposable income and rising vehicle costs (including fuel cost), and accordingly will see a lower growth of 17-20% now as against 22-25% expected earlier.

Within the commercial vehicle (CV) segment, Medium and Heavy Commercial Vehicles (M&HCVs) would see relatively lower impact from the second wave of the pandemic, as construction and mining activities continue largely unimpacted so far. However, the Light Commercial Vehicles (LCVs) are likely to face some demand moderation on account of the rural impact of the pandemic, likelihood of financing challenges for the segment, and some slackening of e-commerce demand due to increased restrictions and wariness. The bus segment would also continue to be severely impacted due to wipeout of the seasonal demand from schools, increased prevalence of work-from-home practices and weak tourism prospects, in addition to the general aversion to public transportation and spaces. Overall, the CV segment is expected to grow by 21-24% (albeit on a low base) in FY2022 now, as compared to 27-30% that was expected earlier.

Tractors, which had reported record sales in FY2022 despite the pandemic impact, are likely to witness largely flattish volumes this year, especially due to the high base of the previous year. Additionally, the rural spread of the pandemic would also act as a dampener. While growth prospects primarily hinge on how the monsoon would pan out, stable crop prices, healthy crop harvest and procurement, along with government support offers some comfort regarding stability of farm cash flows. Overall, ICRA expects the segment to close the year with 1-4% growth, a slight moderation from the 4-6% growth expected earlier.

“While most of the segments would continue to report growth on a Y-o-Y basis, given the favourable base, the growth estimates stand revised downwards given the sharper and longer-than-expected impact of the second wave. While pick-up in the vaccination drive is expected to support flattening of the curve going forward, an elongated recovery cycle or possibility of a third wave offers further downside risks to these estimates,” concluded Mr. Dewan.