“It is expected that demand headwinds would continue over the near-term with likelihood of limited pre-buying ahead of the rollout of BS-VI emission norms. This would exert pressure on earnings and overall credit profile of CV OEMs (original equipment manufacturers) ," the ICRA note said.
CV sales in April-December had fallen 23% year-on-year (y-o-y) to 550,865 units, wholesale data, as reported by major firms, showed. ICRA had earlier issued a negative outlook for the CV segment in FY20.
Data from the Society of Indian Automobile Manufacturers (Siam) had showed that production of goods carriers in the medium and heavy commercial vehicles (MHCVs) segment had fallen over 48% in the April-November period. The sharp fall in MHCV production reflects the existing inventory across respective dealer networks. The top two CV manufacturers, Tata Motors Ltd and Ashok Leyland Ltd, have been offering deep discounts to liquidate their stocks of BS IV-compliant trucks which must be cleared by the end of the fiscal year.
ICRA pointed out that despite discounts, CV inventory remains high at 40-45 days, which would lead to continued inventory correction measures in the fourth quarter of the current fiscal year.
“The excess capacity created in the system post-revision of axle load norms in July 2018, coupled with the slowdown in the rollout of infrastructure projects and the resultant lower freight availability continued to weigh on demand prospects. The light commercial vehicle, or LCV, (truck) segment also continues to reel under the impact of the slowdown in consumption demand, both rural and urban areas," Shamsher Dewan, vice president, corporate sector ratings, ICRA said in the note.
The agency expects MHCV and LCV volumes to shrink by 16-18% and 8-10% y-o-y, respectively for FY20. The bus segment is also expected to close the fiscal year with 4% decline. Meanwhile, price increase of 10-15% for BS-VI variants, beginning April, is expected to keep CV buyers away in the first quarter of FY21.
“Profit margins are expected to weaken in FY20 due to negative operating leverage and peak discounting levels. CV makers may not be able to completely pass on the increase in costs under BS-VI to customers, thereby leading to subdued margins in FY21, too," Dewan said over the phone.
He added that a vehicle scrappage policy could bring in some positive impact, based on the incentives that the government offers. “When the first vehicle scrappage draft was presented years ago, the government talked about offering major incentives. However, now, more than incentives, it is about penalizing old vehicles. So, over time, the scrappage bonanza appears to have got diluted," he said, adding there were several small fleet owners who have lost money in the transport business.
ICRA, which has issued a negative outlook for passenger vehicles (PVs) for FY20, also said the demand cycle for PVs is bottoming out, and there could be a gradual recovery in next fiscal year. Though, the agency expects the government’s efforts to ease liquidity crunch would be visible in next two-three quarters, any meaningful improvement in retail demand would depend upon recovery in rural income and economic activities.
“Revenue growth (for carmakers) over the next two quarters will remain muted even as a gradual recovery is expected post-June 2020," Ashish Modani, vice president, ICRA, said over the phone, adding the rabi harvest will have a positive impact on rural income. “Car purchases, largely a discretionary decision, depend heavily on consumer confidence and when people are sure of job security," he said. PV sales fell over 19% for the three quarters ended December 2019.
For the auto component industry, ICRA expects a revival in the second half of FY21, driven by a gradual recovery in PV sales and stable demand for two-wheelers.
ICRA’s sample, which accounts for about 31% of supplier industry (revenue-wise), spent ₹22,000 crore in the past three years. “This sample has deferred about 15% of its FY20 capex, mostly all the growth capex. Maintenance capex, which is normally 2-3% of revenue, has also been toned down by a few players. However, a few auto component players continue to invest on new platforms backed by secured order books," it said, adding that a revival in suppliers’ capex may be visible only post-FY21.