Passenger vehicle volumes to shrink to decadal low in fiscal 2021: Crisil

The sales volume of passenger vehicles (PVs), including exports, are expected to plunge by 22-25 per cent in this fiscal to a decadal low of about 26.5 lakh units. That would mark the second straight year of double-digit volume decline after the 15 per cent fall seen in fiscal 2020, according to a report by Crisil.

Yet the credit quality of most PV makers (original equipment manufacturers or OEMs) would remain stable because of strong balance sheets and healthy liquidity. In some cases, support from a strong parent/group will help navigate the rough terrain, it said.

“With muted income growth, discretionary spending will take a backseat this fiscal. Small PVs and used vehicles will find favour owing to better affordability. Also, given increasing awareness about social distancing, consumers may reduce, if not avoid, travel by public, pooled and shared transport in the short term. However, the benefit from the change in commuting-pattern will only partly offset the steep downturn,” Anuj Sethi, Senior Director at Crisil Ratings said.

Crisil analysed eight PV makers (including two that are into diverse segments), accounting for 80 per cent of industry sales volume. CRISIL rates six of these, which accounted for about 73 per cent of the sales volume in fiscal 2020.

Crisil has assumed about 60 per cent fall in domestic dispatches in the first half of this fiscal in line with the staggered opening of dealerships from May 2020, followed by a 6-8 per cent revival in balance half of the fiscal, driven mainly by improved rural demand.

This, along with a 15 per cent drop in export volumes, will lead to 22-25 per cent fall in overall sale volume in fiscal 2021, it said.

Another fallout of the pandemic is that used vehicles and new small PVs may find increased preference in fiscal 2021 after demand had swung in favour of affordable sports utility vehicles in the past 2-3 years.

Operating profitability of PV makers will be curtailed this fiscal because of production loss during the lockdown, fixed overheads and lower operating rates, notwithstanding soft input prices and pruned marketing spends.

PV makers will continue offering discounts through the first half, and partly absorb the higher cost of BS-VI (Bharat Stage VI) variants given tepid demand. The impact of this will be ~150-200 basis points, with operating profitability settling at 6-7 per cent this fiscal for the sample set, owing to low operating leverage, with 80 per cent of cost on raw materials.

“The eight PV makers had about ₹50,000 crore of surplus liquidity as of March 2020, which will help them tide over these difficult times. Also, the average debt-to-Ebitda of these players is estimated at about 1.1 times at end of fiscal 2020. This ratio is likely to go up, but remain adequate at close to 2 times by the end of fiscal 2021, supported by pruning of capital spend by at least about 25-30 per cent,” Aparna Kirubakaran, associate director at Crisil Ratings said.

The extent of the Covid pandemic, and ability of the component supply chain and automotive dealerships to stabilise operations will remain key monitorables, it added.

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