Wholesales of passenger vehicles will decline by 10-12% in FY 21, due to the adverse impact of the Covid 19 pandemic on the economy, according to credit ratings agency ICRA. Vehicle manufacturers had to shut factories for several days to comply with government directives aimed at curbing the spread of pandemic.
The automobile industry has been battling headwinds like credit crunch in financial institutions and decline in consumption demand over the last year and half, which led to significant decline in sales across categories. The outbreak of the pandemic, which coincided with the transition to BS 6 norms, will further prolong the recovery process for the sector.
According to a note published by ICRA, the lockdown will put financial stress on consumer’s income level and will result in deferral of non-discretionary items like passenger vehicles and this is likely to delay industry’s recovery prospects by about six to eight months.
Notwithstanding the favourable commodity prices, negative operating leverage and high discounts have impacted the credit metrics for passenger vehicle manufacturers, dealers and vendors. This comes amidst rapid and mandatory technological advancements in vehicle safety and emissions, which has led to sizable capital expenditure by all the players in the segment, the note further added.
Hence, the ICRA has changed its outlook for the segment to negative for the current fiscal year.
According to the agency, profitability pressures on the relatively low volume players may be even higher due to the current pandemic, which may result in sustained dependence on external financing to fund losses and capital expenditure requirements.
Asish Modani, vice president, co-head, corporate ratings ICRA Ltd, said that improvement in consumer sentiments and overall growth uptick in economy is crucial for any meaningful recovery in the industry.
“In the next two to three quarters, ICRA expects that retail demand during first quarter of FY 2021 will remain significantly weak, with some signs of recovery likely towards festive season. 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,” added Modani in a note on Friday.
