India Ratings and Research (Ind-Ra) has maintained a stable outlook on the auto sector for FY20.

This is based on expectations of moderate sales volume growth in the passenger vehicle segment, high single-to-low double-digit growth in the commercial vehicle segment and steady growth in the two-wheeler segment on a year-on-year basis.

In 9MFY19, the sector registered a 10 per cent y-o-y growth in sales volumes and is likely to register 8-10 per cent y-o-y growth in overall industry volumes in FY19, according to a statement.

India is likely to adopt BS-VI from April 1, 2020, under which all vehicles will be required to comply with higher emission standards, making vehicles costlier across all segments. According to industry estimates, the cost of petrol variant PVs and 2Ws could increase 10-15 per cent and that of diesel variants by 20-25 per cent. Thus, Ind-Ra expects demand to pick up pace in 2H FY20, although demand is likely to remain tepid in 1HFY20.

During October-December 2018, tight liquidity conditions among non-bank financial companies led to a decline in auto sales volume, especially CVs. In FY20, Ind-Ra expects the liquidity of non-bank financial companies to improve, thus improving the funding availability; although not as much as pre-IL&FS crisis era.

As a result, Ind-Ra expects sales volumes to improve from the current levels, although the growth rate is likely to be moderate.

Apart from improved finance availability, increased construction and industrial activity will continue to favour CV demand. Ind-Ra believes revised axle load norms will shift demand towards lower tonnage vehicles compared with the earlier expectation of higher tonnage segments, and is also likely to lower the overall sales volume.

Further, with stabilisation of fuel prices and a further rise in interest cost unlikely, Ind-Ra expects consumer sentiment to improve modestly, especially in the PV and 2W segments.

The tax rebate, announced in the 2019 interim budget, is also likely to improve the disposable income of the middle class, positively impacting the demand for 2W and entry-level PV segments.

The rating firm expects credit ratings of most large players in Ind-Ra’s sample set to be unaffected in FY20, despite capex plans, in view of ongoing regulatory changes, development of an electric vehicle platform and continued new product launches.

The existing lower leverage of most of the companies in the sample set makes their credit profiles resilient, even in the event of a debt-led incremental capex in the medium term, due to their robust operating cash flows and strong financial flexibility.

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