State-wise lockdowns to impact auto industry: CARE Ratings

CARE Ratings expects H1-FY22 to be softer and sales to gain pace from October onwards, with festivities, wedding season, assuming the reopening of schools, colleges, offices and rise in infrastructural and mining activities.

The imposition of strict state-wise lockdowns in April and or May would seriously dampen the automobile industry’s growth as production levels would deteriorate and closure of dealer showrooms will lead to a fall in retail sales. The unsold inventory may pile up and affect the cash flows of the players, said a note by CARE Ratings.

Given the rapid surge in Covid-19 cases across the country, Q1-FY22 sales volumes for all segments are expected to be on the lower side. Maharashtra, which accounts for a significant proportion of auto sales in India, has announced stricter restrictions and expects this to be further extended up to at least mid-May if Covid-19 cases do not suppress, vaccine supply shortages are not restored at the earliest and adequate healthcare facilities continue to be unavailable.

CARE Ratings expects H1-FY22 to be softer and sales to gain pace from October onwards, with festivities, wedding season, assuming the reopening of schools, colleges, offices and rise in infrastructural and mining activities.
Analysing the FY’21 performance CARE Ratings said the automobile industry witnessed a catastrophic effect in the fiscal as sales volumes were pushed back by multiple years. For passenger vehicles, sales volumes were lowest since FY16, for two-wheelers — lowest since FY15, for commercial vehicles – lowest since FY11 and three-wheelers – lowest since FY03. FY21 was an unpleasant year for the automobile industry including ancillaries.

The Q1-FY21 period witnessed the transition from BS-IV to BS-VI, the various Covid-19 induced nationwide and non-uniform state lockdowns. The restriction on movement of people created labour shortages and the closure of factories led to manufacturing levels dropping to significantly low levels.

Alongside, the automobile dealerships suffered due to various zone-wise (red, yellow, green) closures across the country. In addition to the disruption in supply chains, consumer sentiments further descended due to the fear of job losses and a fall in income levels. Hence, the spread of Covid-19 added to the woes of this industry, which was already grappling under the slowdown effects faced by the Indian economy since FY20, it pointed out.

From Q2-FY21 onwards as government restrictions eased, production gained pace and supply chains gradually restored. During the quarter, demand for vehicles remained on the lowered side due to the closure of schools and colleges, reopening of a limited number of offices and reduced infrastructural and mining activities. All of these impacted domestic sales of two and three-wheelers, passenger vehicles and commercial vehicles, according to the rating agency.

The Q3-FY21 witnessed a turnaround in the industry as its wholesales as well as retail volumes started gaining momentum, owing to the pent-up demand, festive and wedding season. Just as the industry was on the path to recovery, it faced a new impediment in the form of shortages in semi-conductors, a critical part used in vehicle manufacturing. Simultaneously, the shortage of containers and high freight charges affected the transportation of components. This took a toll on the Q4-FY21 wholesale volumes. Demand during the same quarter was affected by high fuel prices and price hikes by automobile OEMs, it said.

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