Covid-19: Auto industry may suffer a huge setback amid slow recovery
- While the auto sector has seen stringent cost-cutting, IIFL Securities expects half of its coverage universe to report losses in Q1 2021
- Passenger vehicle sales can drop to a decade's low in the current fiscal, warns ratings agency Crisil
Automobile companies' resumption of manufacturing and sales after the government eased covid-19 induced lockdown restrictions, came as a relief to investors. The Nifty Auto index is back to its February levels.
While automobile sales are seeing sequential (month-on-month) improvement, many fear the recovery to be weak, impacting near term financial performance of the companies. “Q1 FY21 was a forgettable quarter for the auto industry, with year-on-year volume decline ranging from 45% to 96%. Plants were shut in April and the early part of May. Production ramp-up was lower than normal in June. Despite stringent cost-cutting efforts, we expect half of our coverage universe to report losses in Q1,” analysts at IIFL Securities Ltd said in a note.
Ratings agency Crisil warns passenger vehicle sales can drop to a decade's low in the current fiscal, clocking a double-digit fall in volumes for the second consecutive year. This is at variance from the steady growth that the passenger vehicle industry has seen in the previous five years (FY15-FY19).
Consequently, industry observers remain wary. Last month, Moody’s Investor Service downgraded the credit rating of Tata Motors Ltd. In fact, Moody’s downgraded nine of the 22 global automakers it rates, or 40% of its global portfolio. The ratings agency warns global light vehicle sales may slump at least 20% in the current year.
“Even with our expectations for a solid recovery in 2021 (around 11.5%) and 2022, based on Moody's latest Macroeconomic Forecast, it will be years before auto sales return to the 2019 level,” Moody’s Investors Service said in a note referring to global vehicle demand. “Also, the risk to our forecast for the rest of this year is to the downside because it is predicated on a steady production recovery from factories that were closed for much of the (June) second quarter. Also, sales need to recover steadily by August and September to limit the drop to just 20%.”
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