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Outlook for two-wheelers stable, negative for cars, CV and components: Icra

Credit profile of two-wheeler makers may remain strong despite moderation in earnings; demand weakness in domestic market has been partially offset by healthy export growth

T E Narasimhan  |  Chennai 

Auto crisis: Wholesale numbers may take a back seat amid rising inventory

Despite the on-going slowdown, two-wheeler OEMs have a stable outlook, while passenger cars, commercial vehicles and auto components outlook will be negative, says rating agency Icra.

For the next 12-18 months outlook for two-wheeler is stable, says Icra, inspite of the on-going slowdown in two-wheeler sales and near-term volatility anticipated due to forthcoming BS VI transition.

Icra expects the credit profile of two-wheeler makers to remain strong despite moderation in earnings. Furthermore, demand weakness in the domestic market has been partially offset by healthy export growth.

The domestic two-wheeler segment reported volume contraction for the 12th consecutive month in November 2019, intensifying one the steepest slumps since FY2008. Volumes were down by 15.7 per cent on year-on-year(YoY) basis in 8M FY2020 and in December, Hero, Bajaj and TVS cumulative numbers were down by 13.73 per cent. The reasons for this scenario include poor customer sentiment especially in rural markets, increase in ownership cost, rising fuel cost, and credit issues among others.

With prices set to rise post BS VI by 10-12 per cent, OEMS expect some pre-buying in Q4 FY2020. However, demand may remain subdued during the first half of fiscal 2021, and is expected to pick up only in the second half as consumers start adjusting to the new normal and rural sentiment improves following a better rabi crop harvest.

While industry volumes are likely to contract by 8-10 per cent in FY2020 amid subdued demand and the high cost of producting the BS VI portfolio, the operating margins of two-wheeler OEMs are expected to moderate marginally from the current levels. Nonetheless, their credit profiles are expected to remain strong, supported by healthy accruals and financial flexibility from sizable cash and liquid investments on the books. The OEMs are expected to continue to invest towards new product development, technologies (like Electric Vehicles) and enhancement of domestic and overseas sales network, says Icra.

For the passenger car sector, Icra has maintained a negative outlook given the slowing economic growth, the sharp decline in wholesale despatches to de-stock dealership inventory as well as tepid retail demand.

Outlook for two-wheelers stable, negative for cars, CV and components: Icra

According to the sales reports, released on Wednesday, of seven of the 15 PV makers, the segment grew by 2.08 per cent to 208,546 units in December 2019.

Liquidity crunch and tighter financing environment, weak rural income and overall slowdown in economic activity have adversely impacted consumer sentiment. This, in turn, would exert pressure on the earnings and overall credit profile of the PV OEMs.

Despite accommodative commodity prices, muted demand and high discounts have impacted the credit metrics for PV OEMs, and their dealers and vendors. This comes amid rapid and mandatory technological advancements in vehicle safety and emissions, which has led to sizable capital expenditure by PV OEMs and their vendors over the past few years. Moreover, debt-funded modernisation has also taken toll on the capital structure and profitability of the dealerships, says Icra.

PV purchase being a discretionary item, improvement in consumer sentiments and overall growth uptick in economy remain crucial to have any meaningful recovery in the near term.

Icra believes overall recovery is likely to be gradual and slow paced. Given a steep 18 per cent decline in wholesale despatches YTD in FY2020, overall wholesale volume is expected to shrink by 14-16 per cent in current fiscal though second half will be much better than first half.

Low base of H1 FY2020, especially of Q2 FY2020 will optically improve growth rate for next fiscal but industry volume is unlikely to surpass FY2019 volumes in FY2021.

Icra continues to maintain a Negative year-end outlook for the commercial vehicle (CV) segment over the near term, given the slowing economic growth, current overcapacity in the CV space and tight financing environment. For Autcomponents ICRA has maintained its negative outlook on the auto component industry, given the continued and broad-based contraction in OEM sales.

First Published: Sat, January 04 2020. 11:38 IST
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