Ind-Ra has negative outlook on auto ancillaries in FY21

With the lingering crisis in the auto sector, which has been going through the worst demand fall in two decades, the ancillary players are in for a bad times in FY21, says a report.

Rating agency India Ratings has accordingly placed a negative outlook on the sectoras it expects flat-to-low single-digit growth in auto volumes next year, after falling in double digits so far this fiscal year. Auto sales have plunged 16 per cent till January.

Continuing weak sales amid unfavourable macroeconomic factors, uncertain regulatory environment, limited credit availability along with increased cost of ownership after BS-VI implementation do not offer any great greenshoots, it said in a report on Tuesday.

"We expect subdued vehicle sales in the first half of FY21, after the BS-VI implementation, as consumers would take time to accept the revised pricing and a recovery only after the start of festive season," says report.

While the BS-VI passenger vehicle prices are up over 10 per cent, the same version of two-wheelers are up 10-15 per cent.

An added worry for the ancillaries is the continuing correction in dealer level inventory, which has constrained demand, which according to the agency will lead to a high single digit decline in revenue this year, before making a modest recovery in mid-single digit in FY21.

"Demand is likely to receive an impetus from higher content per vehicle on the back of evolving regulatory norms and capabilities developed for BS-VI and electric vehicles, which could also be used to service other markets with similar regulatory requirements," says the report.

Margins of auto ancillaries may improve modestly in FY21 due to an improvement in operating leverage, but will remain below the FY19 levels. Downside risks can arise from pricing pressure from OEMs, primarily in the first half, as they may not be able to fully pass on the price increases on account of BS-VI norms in a subdued demand scenario.

Most auto ancillaries entered FY20 after a period of elevated capex spending. With the demand falling, these companies have deferred non-essential capex.

Yet, the report expects their credit metrics to remain elevated in FY21, thanks to the deep deterioration in FY20. The capex cycle will resume once the demand conditions improve, likely in FY22.

Accordingly, the agency has a negative outlook on the sector, based on the expectations of a continued weaker-than-envisaged operating performance and credit metrics in FY21 amid a challenging economic environment.