Around 20% slowdown in volumes growth expected in FY21E

~By SHUBHAM RAI

 

The coronavirus outbreak has heavily impacted the automotive sector. In fact, the automotive industry can be counted as one of the biggest victims of the COVID-19 crisis among the steel-using sectors. Original equipment manufacturers (OEMs) and parts suppliers are yet to return to full production capacity. Meanwhile, non-availability of laborers, shattered supply chains, delayed payments and cash crunch are having a severe impact on the overall business.

In 2020, the automotive industry is expected to experience loss of sales of 20% over and above the losses incurred in the past two years. Several reports are saying that recovery to pre-crisis levels will take several years due to stunted income growth and remote working, but safety concerns might boost demand for passenger cars in the short term.

Furthermore, supply disruptions may continue beyond the lockdown period as liquidity problems will deter the restart of not only car producers, but also of auto parts suppliers.

The Indian automobile industry, which employs around 50 million people directly and indirectly, is the fourth largest in the world with an annual turnover of around INR 5-6 trillion. India’s two-wheeler industry is the largest in the world, while India is also the largest tractor manufacturer and the eighth largest commercial vehicle (CV) manufacturer in the world.

The automobile sector currently contributes about 50% to India’s manufacturing gross domestic product (GDP) and accounts for around 7% of the overall GDP.

In FY20, about 3.5 million cars were produced in India, while the production of commercial vehicles (CVs) stood at around 0.8 million units. Notably, the two-wheeler segment dominates the industry with a volumes share of around 80%.

Pre-COVID-19 Performance

Mitul Shah, Vice-President, Research, Reliance Securities, tells Steel360, “The Indian automobile industry has been witnessing tough times due to the COVID-19 pandemic since the past 3-4 months. While the industry’s sales volume declined by 16% year-on-year (y-o-y) during the first 11 months of fiscal year 2019-20 (April 2019-February 2020), it recorded a steep 45% y-o-y decline in March 2020 alone due to the COVID-19 pandemic. Moreover, the industry reported zero volume in April 2020 and recorded >80% y-o-y volume de-growth in May 2020.

During the previous five years (FY14-FY19), the Indian automobile industry had witnessed an average volumes growth of 7% y-o-y.”

He adds that the auto sector has been witnessing a rough patch over the last 12-18 months due to a few factors like higher axle load norm (negative for CVs), non-banking financial institution (NBFC) issues, higher insurance premium, overall weak demand, slowdown in urban sales, and shift to shared mobility along with transition from BS-IV to BS-VI platforms.

Moreover, the COVID-led nationwide lockdown brought the industry to a complete standstill since the last week of March 2020. A prolonged slowdown in consumer demand due to lockdown has significantly affected the volumes, revenues and cash flows of the domestic auto manufacturers (OEMs).

 

Auto dealers, who were unable to deliver vehicles during the lockdown, reported 30-45 days of finished goods inventory, which is likely to have been heavily discounted post-lockdown. Further, they also faced significant difficulty in liquidating the BS-IV inventory during the last 10 days of FY20. The OEMs will need to financially support the dealer community, which will further stretch their own balance sheets.

As the auto suppliers are highly dependent on the migrant laborers, their mass exodus is expected to further delay revival post-lockdown, and disrupt the entire value chain. Liquidity issues and unavailability of laborers at suppliers’ level are causing widespread disruptions across the entire manufacturing ecosystem.

Shah further says: “Captive finance companies would also face challenges in terms of recovery of loans, EMI regularisation and likely defaults, which would take the next 2-3 quarters to stabilise.”

Key Challenges

Challenges for the automobile industry in a post-COVID-19 lockdown scenario can be mainly categorised into four segments – research and development (R&D), raw material procurement, manufacturing, and financing.

Migrant Labour Issue

Shah observes that the Indian automotive sector will continue to face challenges in terms of non-availability of laborers and concerns over health and safety management on the shop-floor following the COVID-19 pandemic, which may force the OEMs to accelerate adoption of digital technologies in manufacturing. On an average, migrant laborers account for 35% of the total work force in the industry, which is even higher in tier-II and below towns. Return of the migrant laborers is certainly a challenge for the industry over the next 2-3 months. While the COVID-led health crisis will settle gradually, it will have a profound effect on people’s behavior as well as in the ways of working, especially on the shop-floor.

He adds that, “Due to growing apprehensions over the rising infections, the workmen are refraining from attending factories/workshops/showrooms. Thus, availability and redeployment of contract laborers would be a major concern for the entire value chain, post-lockdown.”


Revenue, Margin Concerns

To what extent will revenues, margins of automakers be hit in the first half (H1) of this entire fiscal?

“The Indian automobile industry may post an aggregate 20% decline in volumes, which we believe will lead to 10-15% lower revenues in FY21E. The domestic automakers could witness 200-500 bps compression in operating margins,” says Shah.

Strong Rebound In FY22E?

Shah observes: “On account of the COVID-led disruptions, we expect a complete washout in Q1, FY21E. However, sequential improvement in Q2, FY21E and Q3, FY21E would result in moderate volumes recovery in H2, FY21E. We expect strong rebound in the industry’s volumes in FY22E, which would surpass FY20 levels, while FY23E volumes would surpass the previous peak witnessed in FY19. This will translate into an industry volumes growth of 35% and 8% in FY22E and FY23E, respectively, post declining by around 20% in FY21E.”