2nd Covid wave derails recovery momentum of auto industry

The second wave of the pandemic in the country has derailed the recovery momentum of the domestic auto industry, which was poised for a comeback in the current fiscal after witnessing the two consecutive challenging years, ratings agency ICRA said on Thursday.

Unlike the first wave where infections were largely localised to urban clusters, the second wave has seen deeper and wider penetration, including into rural hinterlands.

Accordingly, outlook for various segments has been revised downwards, it said.

While pick-up in the vaccination drive is expected to support flattening of the curve going forward, an elongated recovery cycle or possibility of a third wave offers further downside risks to ICRA's volume estimates, according to ICRA.

Many auto original equipment manufacturers (OEMs) and auto ancillaries resorted to plant shutdowns as a restrictive measure.

The automotive dealerships across regions have also not been operational in light of regional restrictions imposed by various states and local authorities in order to curb the pandemic, it said.

The agency added that as per an ICRA note, while these would cause near-term supply disruptions in the sector, the larger and prolonged impact is likely to be on account of the impact on various demand drivers.

Accordingly, the ratings agency has revised the growth estimates for most of the different automotive segments downwards.

Segment-wise, ICRA said, the two-wheeler volumes are expected to be the most impacted, with the target consumer segment's affordability and demand sentiment sharply hit by the second wave.

Accordingly, domestic two-wheeler volumes in 2021-22 are expected to grow 10-12 per cent now as against 16-18 per cent earlier.

The passenger vehicle segment may see a lower growth of 17-20 per cent now as against 22-25 per cent expected earlier, as per ICRA estimates.

Overall, the commercial vehicle (CV) segment is expected to grow 21-24 per cent (albeit on a low base) in 2021-22 now, compared with 27-30 per cent that was expected earlier.

ICRA said recovery trends were quite encouraging from the second half of 2020-21 onwards, with various automotive segments reporting healthy sequential recovery, post relaxation of the lockdown-related restrictions.

It, however, added that the sudden and severe onset of the second wave of the pandemic in the country has derailed the recovery momentum of automobile OEMs and auto-ancillaries to an extent.

ICRA Ratings vice-president and group head Shamsher Dewan said, "The second wave of the pandemic, the intensity of which has taken the entire country by surprise, is expected to impact near-term automobile purchases across segments."

Additionally, the significant medical spends have eroded the purchasing power of individuals and families to a greater extent, which would impact large-ticket discretionary purchases like vehicles, at least over the near term, he said.

The domestic passenger vehicle (PV) segment would also see a softening of demand due to the spread of pandemic to hinterlands, hit on disposable income and rising vehicle costs (including fuel cost).

Accordingly, it will see a lower growth of 17-20 per cent now as against 22-25 per cent expected earlier, it said.

Within the CV segment, medium and heavy commercial vehicles (M&HCVs) would see relatively lower impact from the second wave of the pandemic, as construction and mining activities continue largely unimpacted so far.

However, the light commerce vehicles (LCVs) are likely to face some demand moderation.

This is on account of the rural impact of the pandemic, likelihood of financing challenges for the segment, and some slackening of e-commerce demand due to increased restrictions and wariness, it said.

The bus segment would also continue to be severely impacted due to wipeout of the seasonal demand from schools, increased prevalence of work-from-home practices and weak tourism prospects, in addition to the general aversion to public transportation and spaces, according to ICRA.

Tractors, which had reported record sales in FY2022 despite the pandemic impact, are likely to witness largely flattish volumes this year, especially due to the high base of the previous year.

Additionally, the rural spread of the pandemic would also act as a dampener. While growth prospects primarily hinge on how the monsoon would pan out and stable crop prices will offer some comfort regarding stability of farm cash flows, it said.

Overall, ICRA expects the segment to close the year with 1-4 per cent growth, a slight moderation from the 4-6 per cent  growth expected earlier, the ratings agency said.

"While most of the segments would continue to report growth on a y-o-y basis, given the favourable base, the growth estimates stand revised downwards given the sharper and longer-than-expected impact of the second wave," Dewan said.

He added that while pick-up in the vaccination drive is expected to support flattening of the curve going forward, an elongated recovery cycle or possibility of a third wave offers further downside risks to these estimates.

Photograph: B Mathur/Reuters