While there have not been any automotive sector-specific announcements during the last couple of budgets – the government has reinforced its focus on the rural economy, agri-logistics and infrastructure investments in its successive budget speech. The last budget also provided a boost to disposable income for the middle-income category through income-tax reliefs, which benefit the entry-level automotive segments.
We expect the government’s thrust on rural economy, agri-infrastructure and infrastructure spend to continue in the upcoming budget as well, though the overall allocations would be constrained by the limited available fiscal space. This apart the recently announced production-linked incentive (PLI), the details of which are expected during CY2021, has the potential to kick-start significant investments in the automotive industry. Furthermore, the government’s focus on supporting local manufacturing through the continuation of import duty in the auto component segment continues to support investments by ancillaries in India. The automobile OEMs too are focusing on reducing reliance on imports and building supply chains with vendors in India in segments, particularly in the electronics and allied products segments, where our ecosystem has had limited capabilities.
The automotive industry faced strong headwinds during FY2020 with the slowdown in economic activities during H2 FY2020, exacerbated by the NBFC crisis, which affected demand significantly. The industry also grappled with challenges of investments and significant cost increases, following the across-the-board tightening of emission and safety norms, especially the BS-IV to BS-VI transitions during March 2020. On the back of these came the COVID-19-related lockdown, which not only disrupted manufacturing activities and supply chain, consumer demand also suffered unprecedented setbacks during the first six months of the current fiscal.
The rural sector, however, withstood the COVID-19 challenges better – which is manifested into relatively robust demand in rural-focused product categories, especially tractors. The rural sentiment had been positive after two healthy crop cycles of kharif and rabi in 2019 and healthy water reservoir levels. It has been further helped by a normal monsoon, healthy crop outputs, and government support in the form of increased procurement of key crops at MSP, higher MNREGA allocations, the MSME guarantee loans, etc. Accordingly, the post-pandemic recovery has been rural-led, while urban India has been catching up gradually.
The domestic commercial vehicle (CV) segment witnessed a steep volume contraction of 29 percent in FY2020, as it battled multiple headwinds. Challenges such as overcapacity in the trucking system, subdued freight availability due to a weak macroeconomic environment, cost increases due to new emission norms (BS-VI), financing constraints, and stress on the cash flows of fleet operators, have all exacerbated with the onset of the pandemic, and the lockdowns imposed to contain the same. Accordingly, fleet operators cut back new vehicle purchases, resulting in the 85 percent and 55 percent contraction in CV retail volumes witnessed in Q1 and Q2 FY2021 respectively. ICRA’s recent survey of CV dealers across 11 states, indicated muted sentiments, despite sequential improvements in the demand. The stress suffered by the fleet operators has turned the lenders increasingly cautious towards the CV segment. This has resulted in lower Loan to Value (LTVs) ratios, higher rejection rates, and increased turnaround time in financing. As the CV sector is heavily dependent on financing (>90 percent penetration), hurdles in securing financing remain a major impediment to sales, till the overall sentiment improves. Dealerships have also turned cautious on the discounting front, with more than half the dealers indicating discount levels of less than 10 percent.
The Scrappage Policy, relevant for the CV industry, has been long overdue after its initial draft was proposed in May 2016 and actions may be expected next year. The benefit of the Scrappage Policy to the industry will depend on a) the age qualification for the scrapping vehicles and b) the extent of the incentive offered. In case the age qualification is kept for vehicles older than 15 years, the impact will be muted as only a limited number of vehicles would qualify for the scheme. The CV parc older than 15 years is estimated to be around 650,000 units only. Such older trucks are generally used in hinterlands for short-haul operations by the SFOs; hence, are unlikely to be replaced, without significant commercial incentives.
The passenger vehicle (PV) segment has recorded a strong sequential recovery supported by strong rural demand and recovering consumer sentiments, as demonstrated by the festive season pick-up. Discounts eased across the OEMs, indicating an improved demand environment with retail financing also easing. Overall, the industry is likely to end the year, with a relatively modest 8-10 percent volume decline in FY2021.
The other factor which has a significant bearing on the automotive industry over the medium-to-longer term is the recently announced PLI scheme. The scheme aims to make India a part of the global value chain in manufacturing and plans to attract fresh investments. It has allocated Rs 57,000 crore for the auto segment and another Rs 18,100 crore for the advanced chemistry cell batteries (Li-Ion battery). These incentives have the potential to kickstart significant investments in the coming years and help the industry achieve globally competitive scales in the chosen segments. The operational details of the scheme, however, would be known only in the coming years.
ICRA has improved its volume outlook for most segments of the auto industry, in view of the sequential recovery in economic activity across segments. After sharp declines in the last couple of years, the M&HCV truck segments would grow by 40-45 percent and the LCV segment is expected to grow by 15-20 percent during FY2022. After two consecutive years of declines, the PV segment would grow at 15 percent plus during FY2022. Long-term growth drivers for the PV industry – relatively low penetration, weak public transport infrastructure, high financing penetration, favourable demographics and improving per capita income, urbanisation and improving road infrastructure etc - remain intact. ICRA expects the 2W segment to grow at 11 percent during FY2022, supported by a strong growth in motorcycles.
However, to put these volumes in perspective, much of the FY2022 growth for the automotive industry is supported by a low-base effect, and the volumes would remain significantly below the highs experienced by the industry in FY2019. The volume estimates for the subsequent years, however, would hinge on sustenance of the economic momentum, and the infrastructure and capex spend over the next two to four quarters.