Apex auto bodies, the Auto Component Manufacturers Association (ACMA) and the Federation of Automobile Dealers Associations (FADA) said the K V Kamath Committee’s recommendations on loan restructuring will help the auto sector, but the financial ratios recommended by the experts committee needs to be reconsidered.

Large listed companies in the auto component and automobile manufacturing space are unlikely to opt for loan recast as most of them have strong balance sheets with very little debt. It will largely impact smaller firms in the sector, said analysts.

According to FADA, only a few dealerships will come under the purview of the ratio suggested by the committee. Deepak Jain president, ACMA said, the ratio should be capped on the basis of the average asset life and therefore the debt to Ebitda (earnings before interest, tax, depreciation and amortization) should be revised to six times from the current 4.5 times.

“Considering the average asset life in the industry to be around 10 years, we recommend the committee to enhance the ‘Total Debt/EDITDA ratio’ to six times from the current 4.5 times. The premise of repaying loans in 4.5 years for assets that will last over double the time needs to be reconsidered,” said Jain.

The cost of borrowing capital in India is one of the highest in the world, said Jain. ACMA has requested the committee to recommend lending to auto component makers at the same interest spread as priority sector. This will help protect the industry from any downgrade in ratings due to the adverse impact of Covid-19 related disruptions.

The sector, dominated by small and medium enterprises, went through severe hardships on cash flow and working capital during the lockdown. “With green shoots now emerging in the market, we are hopeful the report will come handy in resolving the borrowing related issues of the sector and financing of technology investments for the industry to become Atmanirbhar and innovative,” said Jain.

Automobile retailers also said while the suggestions offer relief but only to some extent. Vinkesh Gulati, president, FADA said the recommendations of the report will benefit only a small section of dealerships. “On an average we have current ratio of 0.8 - 0.9, due to the already two- year distress we have seen. Hence, the ratio suggested as 1 will be a difficult parameter,” said Gulati. FADA has 15000 dealers in the country as dealers.

A spokesperson at Society of Indian Automobile Manufacturers (Siam) , the apex body said the members are still reading the implications of the recommendations on auto companies and will not be able to comment immediately.

Auto sales in India entered the slow lane in September 2018. Passenger vehicles sales in India declined 20 per cent in FY20, the sharpest in a decade. The pandemic induced lockdown broke the supply chain even as a sputtering economy sapped demand. While two wheelers and PV sales have been inching up month on month since June, companies are not confident of demand sustenance.