Auto sector and the COVID-19 impact

Two wheeler exports have continued to remain robust and that is reflected in the steady growth over the last 3 years at a time when domestic sales have stagnated. But, how will COVID impact the auto sector?

Jun 19, 2020 01:06 IST India Infoline News Service

The problems for the auto sector had started long before COVID-19 even reared its head. Since mid-2018, the Indian auto sector has been under stress. It began with a slowdown in demand and then the NBFC defaults exacerbated the crisis. This led to a secular fall in YOY sales month after month. The graphic below captures the returns on the NSE Auto Index since Jan 01, 2020. The Index has certainly bounced from the lows of March but it is still more than 50% below the peak levels of 2018.

Data Source: NSE

Interestingly, the auto sector has shown a sharp sectoral recovery of over 41% from the lows of 24 March. This can be attributed to value buying by long term investors as well as bets on post COVID-19 recovery in consumer demand.

Exports saved the day for the auto sector

From the levels of fiscal year 2016-17, automobile exports are up almost 33%. However, domestic sales of automobiles have almost been at the same level as fiscal year 2016-17. While exports of passenger vehicles and commercial vehicles have taken a hit in the last three years, the export volumes of two-wheelers showed sharp growth. Exports have saved the day, but it is not too clear how these exports will shape in FY20 as COVID-19 pandemic has almost systematically hit most auto markets. Here is a sneak peek at domestic sales.

Category 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20
Passenger Vehicles 26,01,236 27,89,208 30,47,582 32,88,581 33,77,389 27,73,575
Commercial Vehicles 6,14,948 6,85,704 7,14,082 8,56,916 10,07,311 7,17,688
Three Wheelers 5,32,626 5,38,208 5,11,879 6,35,698 7,01,005 6,36,569
Two Wheelers 159,75,561 164,55,851 175,89,738 202,00,117 211,79,847 174,17,616
Quadra-cycles 0 0 0 627 942
Grand Total 197,24,371 204,68,971 218,63,281 249,81,312 262,66,179 215,46,390
Data Source: SIAM

Domestic sales of automobiles were impacted by multiple factors like high fuel prices, NBFC liquidity crunch and low consumer confidence. However, exports have done a lot better (check table below) till COVID-19 began.

Category 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20
Passenger Vehicles 6,21,341 6,53,053 7,58,727 7,48,366 6,76,192 6,77,311
Commercial Vehicles 86,939 1,03,124 1,08,271 96,865 99,933 60,713
Three Wheelers 4,07,600 4,04,441 2,71,894 3,81,002 5,67,683 5,02,169
Two Wheelers 24,57,466 24,82,876 23,40,277 28,15,003 32,80,841 35,20,376
Quadra-cycles 334 1,556 1,605 4,400 5,185
Grand Total 35,73,346 36,43,828 34,80,725 40,42,841 46,29,049 47,65,754
Data Source: SIAM

Two wheeler exports have continued to remain robust and that is reflected in the steady growth over the last 3 years at a time when domestic sales have stagnated. But, how will COVID impact the auto sector?

Auto Sector – The COVID impact

Auto sector has been under pressure due to a mix of demand and supply factors. However, there are also some positive outcomes, which we shall look at.

• With India’s GDP growth rate for FY21 being downgraded from 5% to 0% and later to (-5%), the auto sector will take a hit. Auto demand is highly sensitive to job creation and income levels and both have been impacted. CII has estimated the revenue impact at $2 billion on a monthly basis across the auto industry in India.

• Supply chain could be the worst affected. Even as China recovers, supply chain disruptions are likely to last for some more time. The problems on the Indo-China border at Ladakh are not helping matters. Domestic suppliers are chipping in but they will face an inventory surplus as demand remains tepid.

• The Unlock 1.0 will coincide with the implementation of the BS-VI norms and that would mean heavier discounts to dealers and also to customers. Even as auto companies are managing costs, the impact of discounts on profitability is going to be fairly steep.

• The real pain could be on the dealer end with most of them struggling with excess inventory and lack of funding options in the post COVID-19 scenario. The BS-VI price increases are also likely to hit auto demand.

There are two positive developments emanating from COVID-19. The China supply chain shock is forcing major investments in the “Make in India” initiative. The COVID-19 crisis has exposed chinks in the automobile business model and it could catalyze a big move towards electric vehicles (EVs). That could be the big positive for auto sector.

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