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.
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.
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.