Macro Economy

ICRA continues its ‘negative’ outlook on the domestic passenger vehicle segment

Our Bureau Mumbai | Updated on June 01, 2020

It says that the demand could contract by 25 per cent in FY2021 amid Covid-19

The Covid-19 outbreak and the back-to-back lockdowns have severely impacted the domestic passenger vehicle (PV) industry, with its demand estimated to decline by 22 to 25 per cent in FY2021, credit rating agency ICRA said on Monday. The volumes of the first two months of this fiscal year are fully wiped off, it noted.

Impact of lockdown extensions

Each lockdown extension by 15 days has taken a toll on the full year industry demand by 3-5 per cent, said ICRA. Given the adverse overall conditions, ICRA continues to have a ‘negative’ outlook on the PV industry since Q2 FY2020, it noted.

Monday’s estimate is against its earlier estimated volume decline of 10-12 per cent in FY2021, it added. The expectation then was that ‘normalcy’ would return by second week of May 2020, it noted.

“However, multiple lockdown extensions are having a direct bearing on economic environment and consumer sentiments. The rapid spread of Covid-19 across regions and consequent lockdown extension by government has wiped off volume during the first two months of current fiscal (April-May 2020),” said ICRA.

Prolonged slowdown

The automobile industry has been reeling under a prolonged slowdown over the last few quarters. However, some signs of recovery were visible in Q4 FY2020, which almost came to a naught post Covid-19 pandemic outbreak as it significantly altered the macro-economic environment, it said.

“Compared to our initial expectation of about 50-55 per cent decline in volume during Q1 FY2021, the decline could be upwards of 80 per cent thereby significantly impacting overall volume growth estimate for the full year,” said Ashish Modani, Vice President, Co-Head, Corporate Ratings, ICRA Limited.

While the demand environment is likely to remain weak for the next 4-6 months, the low base of Q2 FY2020 (when wholesale dispatches declined by 29 per cent YOY) will moderate the pace of decline in Q2 FY2021, he noted.

“As against an actual estimated volume decline of 17.9 per cent in FY2020, the decline during FY2021 could be 27-30 per cent in the worst case scenario, compared to the base scenario of 22-25 per cent. This will be in case the 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 PV market (by volume as well as value),” added Modani.

Overall outlook

ICRA expects GDP to decline by five per cent in FY2021 as compared to its earlier expectation of 4.7 per cent growth prior to the Covid-19 lockdown. Real income is likely to decline in the near-term which will directly impact large discretionary purchases like cars, real-estate amongst others, it said.

As for the credit profile of PV OEMs, players with a strong market position and liquidity buffer will be able to weather the current slowdown, said ICRA. A large number of weaker players may witness moderation, and in the interim, will have to depend for financial support from their stronger promoters, it said.

The credit rating agency’s overall outlook on the automobile dealerships industry continues to remain negative, because of expected decline in profitability levels, as well as due to weak demand and liquidity crunch faced by several dealerships, it said.

“Going forward, the outlook on the passenger vehicle sector could turn to stable from negative, if the 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 the retail demand off-take,” said Modani.

Published on June 01, 2020

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