Auto component sector may see 16% dip in revenue

This will add to the pain from an estimated de-growth of 10 per cent in the industry's revenue to Rs 3.2 lakh crore last fiscal, Crisil Ratings said in its report on Tuesday

By Author  |  Published: 30th Jun 2020  11:19 pm
Auto component
FALLING NUMBERS: According to the report, domestic original equipment manufacturers, which account for over two-thirds of the sector’s revenue, are staring at a decadal low vehicle sales volume.

Mumbai: Supply chain disruptions in the wake of Covid-19 outbreak coupled with weak demand for vehicles in India and overseas is likely to squeeze the revenue of the automotive component sector by 16 per cent this fiscal, says a report. This will add to the pain from an estimated de-growth of 10 per cent in the industry’s revenue to Rs 3.2 lakh crore last fiscal, Crisil Ratings said in its report on Tuesday.

The growth projections are based on an analysis of 300 Crisil-rated auto component suppliers that account for 40 per cent of the sector’s revenue, it said. “The automotive component sector is expected to log around 16 per cent de-growth in revenue this fiscal as the Covid-19 pandemic disrupts the supply chain and impairs underlying vehicle demand in both domestic and overseas markets,” Crisil Ratings said.

According to the report, the domestic original equipment manufacturers (OEMs), which account for over two-thirds of the sector’s revenue, are staring at a decadal low vehicle sales volume at 169 lakh units this fiscal with the production schedule of the manufacturers likely to remain modest in the first two quarters of the fiscal followed by a gradual recovery, Crisil Ratings said. Additionally, demand growth from exports and the aftermarket, which together account for around one-third of demand, will also remain in the red this year.

Muted demand sentiment in major export destinations will dent exports, while lower vehicle usage and closure of automotive servicing workshops during the lockdown will affect aftermarket demand, the report stated. “Possibly for the first time in over a decade, we are seeing demand from OEMs, exports and the aftermarket in the red this fiscal, in addition to demand slowdown for two consecutive years,” said Anuj Sethi of Crisil Ratings.

Despite cost rationalisation measures and the highly flexible nature of cost structures, with 80 per cent of costs being variable in nature, operating profitability will take a hit of up to 250 basis points for the rated portfolio, while the impact on absolute operating profit will be almost 30-35 per cent, he added. “The only silver lining is the sector’s prudent financial practices with respect to capital spending over the past few years, leading to well managed balance sheets,” said Sameer Charania, Director, Crisil Ratings.

The average gearing for Crisil’s sample set remains adequate at less than one-time and is expected to remain under control due to only need-based capital spending and a modest stretch in working capital, he said. Firms with component concentration to commercial vehicles and those which have undertaken large debt-funded expansion in recent times will be more vulnerable than more-diversified ones, the report stated. While the RBI’s moratorium on debt obligations for firms and steps initiated to provide funding to MSMEs (including smaller tier II and tier III suppliers) may help overcome temporary cash-flow mismatches, recovery in demand, which is expected in the next fiscal, is critical for sustained and improvement in the sector’s financial health, it said.

Covid-19: EV market may see lower demand

New Delhi: Electric vehicles market in India may experience a shift as consumers seek affordable products amid Covid-19, and it could make manufacturers resume production for conventional vehicles, according to a report. The report – Towards a Clean Energy Economy: Post-Covid-19 Opportunities in India’s Energy and Mobility Sectors – is prepared by government think tank Niti Aayog and Rocky Mountain Institute.

It also said there may be delays in electric vehicles (EV) production as manufacturers focus on reviving demand and producing BS-VI vehicles, while curbs on imports of Chinese components may lead to disruptions in EV manufacturing.

“Auto sales could decrease by as much as 45 per cent in the financial year 2020–21. EV production could be affected in the short term due to lower demand and supply-chain disruptions with BNEF estimating an 18 per cent decrease in global EV sales in 2020. The EV market may experience other shifts. For example, there is an expectation of demand for more affordable EV products. This potential shift in consumer preferences may affect manufacturers’ investment and production decisions. Ultimately, resuming production levels for conventional vehicles and EVs will depend on demand revival, supply-chain reactivation, and access to the labour force,” the report said.

Lower disposable incomes and a tendency towards cash saving will lead to reduced demand for EV in the short term, the report said, adding “some OEMs’ customers are pushing back their EV business plans by two or more years”. On the impact on EV supply chains, the report said, “There may be delays in EV production as manufacturers focus on reviving demand and producing BS-VI vehicles. Curbs on imports of Chinese components may lead to disruptions in EV manufacturing”.

The report also highlighted the consequences of policy changes stating “many state EV policies and e-bus projects may be delayed due to other priorities and social-distancing challenges”.


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