‘Vehicle demand expected to rebound this FY’

ICRA report says recovery to happen in two-wheeler and used car segment first

By   |  Published: 14th Jul 2020  8:55 pm

Mumbai: Passenger vehicles demand in the domestic market is expected to rebound slowly and gradually this fiscal unlike China, which witnessed a V-shaped recovery, owing to low income and weak consumer sentiment, ratings agency ICRA said in a report on Tuesday.

Currently, affected by an economic slowdown and the coronavirus-induced lockdown, both demand and production have been disrupted and the recovery is likely to happen in the two-wheeler and used car segment first, compared with new car purchases as concerned buyers will want to own personal transport over public transport due to possible infection fears, ICRA said.

“ICRA Ratings has ruled out repetition of Chinese V-shaped recovery of the Indian passenger vehicle (PV) industry, instead indicating that the demand is expected to witness a gradual and a slow-pace recovery in volume,” the rating agency said in the report.

PV sales in the country declined by almost half (49.59 per cent) to 1,05,617 units in June amid the coronavirus pandemic as against 2,09,522 units in the same month of 2019, according to data released by auto industry body Society of Indian Automobile Manufacturers on Tuesday.

Two-wheeler sales also dropped 38.56 per cent to 10,13,431 units during the month as compared to 16,49,475 units sold by the automakers in June 2019. Of these, motorcycle sales were at 7,02,970 units and and scooters’ at 2,69,811 units, seeing a drop of 35,19 per cent and 47.37 per cent, respectively, over the corresponding period of 2019, as per the data. The industry is pinning hopes on revival in rural income to support growth during the festive season and thereafter, ICRA said.

“Automotive sales in China recovered handsomely post easing of lockdown restrictions and the volume followed a sharp V-shaped recovery. This recovery was supported by the consumers’ uneasiness regarding usage of public transport because of possible transmission of Covid-19. Vehicle penetration has a strong correlation with income level, and car ownership remains a distant dream for a large share of Indian population,” said Ashish Modani, vice-president at ICRA.

He said that repetition of Chinese V-shaped recovery is unlikely in India given low income levels and weak consumer sentiments.

“Also, per-capita disposable income in India is not comparable to China or other developed markets; therefore, car ownership continues to remain a distant dream for a large share of Indian population,” Modani added.

The report said the industry’s recovery prospects have been delayed due to the Covid-19 pandemic and it will take minimum 6-8 months for consumer confidence to scale back to February 2020 level.

“Also, recovery in rural income and improvement in overall economic activity remain crucial to have any meaningful improvement in retail demand off-take.” There will be a deferment of about 30 per cent-40 per cent spending towards capital expenditure or investment in the next two financial year on account of lower capacity utilisation, according to the report.

ICRA has already projected a 22-25 per cent contraction in domestic PV demand this fiscal on account of multiple lockdown extensions, which have a direct bearing on the economic environment and consumer sentiments. Back-to-back lockdown extensions by the amid the pandemic have wiped off volume during the first two months of the current financial year, ICRA said adding that each lockdown extension of 15 days has taken a toll on full-year industry demand by 3-5 per cent.

While demand environment is likely to remain weak for the next 4-6 months, low base of second quarter of the financial year 2019-20 (when wholesale dispatches declined by 29 per cent y-o-y) will moderate pace of decline in Q2 FY2021, the rating agency said in the report.

Noting that the industry is banking on revival in rural incomes for recovery as urban markets may remain suppressed in the near term, it said COVID-19 has adversely affected performance of almost all companies which will have bearing on salary increments and job security of employees, thereby impacting their morale.

The pandemic has dented customer’s financial resources as well as their sentiments which will impact car purchase decisions. Discretionary purchases may therefore witness deferment in demand, especially in urban segment though rural markets like UP, MP and Rajasthan should perform relatively better, ICRA said.

Automobile production has been impacted by supply constraints due to lockdown and logistics issues. This is also getting reflected in capacity utilisation that, given the weak demand, is expected to moderate sharply, with overall capacity utilisation likely to plummet below 45 per cent in 2020-21, it said. Over the next 2-3 years, key focus for OEMs is complying with stringent emission (BS6-RDE2) norms that will become eligible from 2023 onwards, as well as incremental investments towards electrification, it said.

The prevailing conditions have also led to a rise in PV delinquencies, which witnessed a gradual deterioration during FY2020, the report stated.