'Auto component sector's revenues may fall by 14-18%'

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SME Times News Bureau | 11 Jul, 2020
Indias auto component sectors revenues are estimated to decline by 14-18 per cent in FY2021, driven by weak demand across domestic OEMs, replacement market and exports, rating agency ICRA said on Friday.

Accordingly, the agency said the industry has been affected by the pandemic and continuing lockdowns which is directly impacting the economic environment and consumer sentiments.

"The exceptions are mission critical replacement components like batteries and tyres will be less impacted," the agency said in a research report.

Besides, it expects the recovery to be gradual and slow-paced, with the industry pinning hopes on revival in rural income to support growth in the festive season and thereafter.

According to the report, automobile volumes are expected to decline by 15-16 per cent in FY2021; within this passenger vehicle demand will decline by 22 to 25 per cent.

"The year will be tough for the commercial vehicles too, given the slowing economic growth, current overcapacity in the CV space and tight financing environment amidst price increases due to transition to BS-VI emission norms," the report said.

"However, two-wheeler sales could benefit as people prefer personal transport and are wary of public transport, easy retail credit availability; and expectations of better demand in rural and semi urban markets, which were relatively less impacted by the Covid-19 pandemic and resulting restrictions," it said.

ICRA noted that the aftermarket performance during FY2020 was impacted due to continued credit crunch across the channel inventory, tight financing environment and overall economic slowdown leading to lower vehicle movement.

"Further, nearly 45 days of sales were lost in Q1FY2021 because of lockdown; the weakness was felt for the rest of Q1 FY2021," the report said.

"The liquidity in the market is tight and consolidation in the aftermarket space, with some smaller retailers facing insolvency is expected. Overall, FY2021 is expected to be sluggish for the aftermarket," it added.

As per the report, exports too will be affected due to fall in European PV sales in CY2020 as a result of demand squeeze caused by weakening macro-economic scenario; and partly due to the pandemic.

"The European HCV demand too will remain subdued in the near term due to the on-going global slowdown. Vehicle sales in the USA are also expected to decline in CY2020 due to pandemic, in addition to several incumbent factors," the report said.

"The sales of North American Class 8 truck orders plummeted in the last three months, hitting the lowest monthly order levels since 2010," it added.

On a positive note, the report cited the accommodative commodity prices will buffer the impact of negative operating leverage to an extent.

Commodity prices across all commodities are expected to remain soft in FY2021.

"The factors that will negatively impact commodity prices are domestic demand uncertainty, with weak auto and infrastructure outlook and pandemic effect," the report said.

Additionally, the rating agency said that given the steep pressure on profitability and cash flows, incremental capex has come to standstill with the focus being only on absolutely necessary capex for maintenance and confirmed order related investments.

"The industry is likely to witness an 40 per cent Y-o-Y decline in capex or investment during FY2021, with capex for auto ancillaries expected to fall below 5 per cent of revenues for the first time in last 10 years," the report said.