Auto sector to end FY20 on a weak note despite stimulus package

G Balachandar Chennai | Updated on August 29, 2019

Passenger vehicle sector is likely to witness a decline in the range of 4-7 per cent.   -  Reuters

ICRA says the sector witness mid-single digit decline in volumes

Despite the support measures announced by the government recently, the automobile sector is likely to witness mid-single digit decline in volumes for the current fiscal.

The slow down started from FY2019 intensified in FY2020, thereby resulting in a sharp decline across segments, including a 22 per cent per cent decline in the passenger vehicle (PV)and 24 per cent decline in M&HCV truck, during the first 4-month period of this fiscal. This is likely to impact the industry’s full year volume growth and performance, according to rating agency ICRA.

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The PV sector is likely to witness a decline between 4 and 7 per cent, while drop in volumes for M&HCV trucks is expected to be in sub-5 per cent level in FY2020. “In the short-term, much would depend on the meaningful demand recovery post monsoons, especially given the fact that many parts of the country have witnessed flooding. Agricultural output, revival in economic and industrial growth would be critical,” said Subrata Ray, Senior Group Vice President, ICRA.

However, it remains to be seen how the auto demand recovers during the festive season and likely pre-buying in Q4 FY2020, in anticipation of post BS VI price hikes.

Meanwhile, the recent steps announced by the government are positive for the sector. The liquidity support announced for the banking system and government spend on infrastructure can be a significant catalyst for the automotive industry.

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“In the short-term, prevailing subdued rural and urban sentiments would matter besides the upcoming regulatory changes regarding emission (BS VI) norms. Whereas the long-term challenges pertain to high investment requirements for technological advancement, lack of policy consensus for EV adoption and increasing traffic congestion in urban areas which may lead to unforeseen regulatory changes,” said Ray.

The EBIDTA margins will likely be moderate for all major PV OEMs, due to negative operating leverage. However, cumulative revenues are estimated to decline marginally, as the decline in volumes will be largely offset by the increasing realisation (due to premiumisation, regulatory impact on car prices – BS6, safety norms etc). In Q1FY2020, most OEMs and their vendors witness moderation in profitability due to negative operating leverage, partially offset by tailwinds in commodity prices.

Published on August 29, 2019

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