How big is the question mark over the auto sector?

Since Jan-18, the Auto Index is down over 51% and there has literally been no let-up.

May 14, 2020 11:05 IST India Infoline News Service

To understand the auto sectors problems in perspective, one needs to just look at the BSE Auto Index over the last 2 years. Since Jan-18, the Auto Index is down over 51% and there has literally been no let-up. But most of this fall is without really factoring in the long term structural implications of COVID-19 and the lockdown.

Data Source: BSE

That brings us to a fundamental question; how big can the correction be on auto stocks? The SIAM has already warned that auto sales could fall by 45% in FY21 due to the lag effect of COVID-19. That is the worst case scenario. SIAM estimates that even in a best case scenario of positive GDP growth in FY21, auto sales could still be lower by 20%. But we shall come back to the futuristic part later. Let us first look at how the auto numbers have performed in the last five years.

How automobile sales panned out between 2014 and 2020

The Indian automobile sector has an annual turnover of $70 billion so that makes the sector extremely important in terms of industrial output, jobs and multiplier effect. However, fiscal 2018-19 was disappointing with the overall auto industry sales down by (-14.73%). The impact on domestic sales was much higher. For example, domestic passenger vehicle sales fell by (-17.88%), commercial vehicles by (-28.75%) and two-wheelers by (-17.76%). The one redeeming feature was exports, which saw an overall growth of +2.95%; largely driven by two wheelies and cars. Check the table below on 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
Quadricycle 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

As can be seen from the above table of domestic sales, the overall sales for the passenger vehicles category are down to almost 2015-16 levels. Let us now look at how exports panned out in the last five years.
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
Quadricycle* 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

Clearly, exports only account for 19% of the total auto sales and that is the segment that has actually shown consistent growth over the last four years. However, the domestic sales, which constitute 81% of total auto sales remains under pressure.

How much could auto sales contract in fiscal 2021?

The Society of Indian Automobiles Manufacturers (SIAM) has painted three possible scenarios for domestic auto sales in the current fiscal.
  • If the GDP for FY21 contracts by (-2%) on a YOY basis, the auto sales for FY21 could contract by (-45%). This would be the worst case scenario.
  • If GDP growth stagnates for FY21 (i.e. grow at 0%), then auto sales are expected to contract by (-35%) in fiscal year 2021. This is a more likely scenario.
  • If GDP growth shows positive traction of 2 to 3%, then the domestic auto sales were expected to contract by (-20%). That is an optimistic scenario.
  • SIAM expects even exports to contract on a YOY basis due to loss of purchasing power across most emerging and developed economies.
The key would be GDP growth and most estimates of India’s GDP growth for FY21 by brokers and rating agencies range between (0% and -5%).

How big is the question mark over auto sales?

Clearly, the auto industry is already reeling, with sales of cars, SUVs, trucks and motorbikes falling 18% in FY-20 to 21.5 million vehicles due to an economic slowdown. But the fiscal 2020 sales represent only 10 days of lockdown. The real impact was felt in April 2020 when all the auto companies reported zero sales. But the bigger question is when the lockdown gets lifted completely and how quickly and effectively production can restart. There are 3 key challenges.
  • Most auto companies still rely on China for input supplies and that supply chain is likely to remain disrupted for some more time.
  • With restrictions on social distancing and availability of labour, most factories are likely to operate at lower capacity, hitting output in the process.
  • The biggest challenge will be on the demand front. The damage to purchasing power and income levels could have a structural impact on auto demand.
With domestic sales and exports under pressure, it is likely to be a long and tough fiscal year for the auto sector.

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