Sales of passenger vehicles could decline by more than 80% in the first quarter of FY 21 due to lock down measures to contain the spread of Covid-19, and drop in affordability of customers as result of the economic slowdown, according to credit ratings agency ICRA. Credit profile of Original Equipment Manufacturers (OEMs) and dealers will also suffer significantly as consequence.
Also, due to the repeated extension of lockdown measures, the ratings agency thinks sales during FY 21 will decline in the rage of 22% to 25% compared to 10-15% expected in the first phase of the lockdown.
According to Ashish Modani, vice-president, co-head, corporate ratings, ICRA, as against an actual estimated volume decline of 17.9% in FY2020, the decline during FY 2021 could be 27%-30% in worst case scenario, compared to base scenario of 22%-25%. This will be in case lockdown extension continues further in large markets like Mumbai Metropolitan Region, National Capital Region, Chennai and Ahmedabad which along with Hyderabad and Bengaluru are amongst the biggest market.
“Compared to our initial expectation of about 50-55% decline in volume during first quarter of FY 2021, the decline could be upwards of 80% thereby significantly impacting overall volume growth estimate for full year. While demand environment is likely to remain weak for next 4-6-months," added Modani.
As a result of the unprecedented fall in volumes, most the small original equipment manufacturers will have to depend on fund infusion from their parent companies to sustain. The dealers of these companies also will face huge cash crunch since volumes of these companies are modest and will decline substantially due to the slow down.
“Coming to the credit profile of passenger vehicle OEMs, players with strong market position and liquidity buffer will be able to weather the current slowdown. Whereas a large number of weaker players may witness moderation; and in the interim, will have to depend for financial support from their stronger promoters," the ratings agency said in a statement.
The statement also mentioned that dealerships has already stared witnessing moderation in credit profile.
“Going forward, the outlook on the passenger vehicle sector could turn to stable from negative, if demand environment improves on a consistent basis over the next 12-18 months. Recovery in rural income and improvement in overall economic activity remain crucial to have any meaningful improvement in retail demand off-take," added Modani.