Icra downgrades growth peg of various auto segments due to second wave

Unlike the first wave, which was largely limited to urban clusters, the second wave has seen deeper and wider penetration, including rural hinterlands

The sudden and severe onset of the second wave of the pandemic in the country has derailed the recovery momentum of auto makers and auto-ancillaries to an extent. As a result, the ratings agency Icra has downgraded the growth estimates for most of the automotive segments, it said in a release on Thursday.

“The second wave of the pandemic, the intensity of which has taken the entire country by surprise, is expected to impact near-term automobile purchases, across segments, said Shamsher Dewan, Vice President & Group Head, Icra Ratings.

Amid lockdowns and curbs by various state governments, auto and component makers have resorted to plant shutdowns as a restrictive measure and automotive dealerships across regions have not been operational. These would cause near-term supply disruptions in the sector, the larger and prolonged impact is likely to be on account of the impact on various demand drivers, Icra said in the note.

Unlike the first wave, where infections were largely localised to urban clusters, the second wave has seen deeper and wider penetration, including the rural hinterlands. Additionally, the significant medical spends have eroded the purchasing power of individuals and families to a greater extent, which would impact large ticket discretionary purchases like vehicles, at least over the near term, he added.

Within the different industry segments, the two-wheeler segment is expected to be the most impacted, with the target consumer segment’s affordability and demand sentiment sharply hit by the second wave.

Accordingly, domestic two-wheeler volumes in FY2022 are expected to grow by 10-12 per cent now as against 16-18 per cent earlier. The domestic passenger vehicle (PV) segment would also see a softening of demand due to the spread of pandemic to hinterlands, hit on disposable income and rising vehicle costs (including fuel cost), and accordingly will see a lower growth of 17-20% now as against 22-25% expected earlier.

“While most of the segments would continue to report growth on a Y-o-Y basis, given the favourable base, the growth estimates stand revised downwards given the sharper and longer-than-expected impact of the second wave. While pick-up in the vaccination drive is expected to support flattening of the curve going forward, an elongated recovery cycle or possibility of a third wave offers further downside risks to these estimates,” said Dewan.

Within the commercial vehicle (CV) segment, Medium and Heavy Commercial Vehicles (M&HCVs) would see relatively lower impact from the second wave of the pandemic, as construction and mining activities have remained largely un-impacted so far.

However, the Light Commercial Vehicles (LCVs) are likely to face some demand moderation on account of the rural impact of the pandemic, likelihood of financing challenges for the segment, and some slackening of e-commerce demand due to increased restrictions and wariness.

The bus segment would also continue to be severely impacted due to wipeout of the seasonal demand from schools, increased prevalence of work-from-home practices and weak tourism prospects, in addition to the general aversion to public transportation and spaces. Overall, the CV segment is expected to grow by 21-24 per cent (albeit on a low base) in FY2022 now, as compared to 27-30 per cent that was expected earlier.

Tractors, which had reported record sales in FY2022 despite the pandemic impact, are likely to witness largely flattish volumes this year, especially due to the high base of the previous year. Additionally, the rural spread of the pandemic would also act as a dampener. While growth prospects primarily hinge on how the monsoon would pan out, stable crop prices, healthy crop harvest and procurement, along with government support offers some comfort regarding stability of farm cash flows.

Overall, Icra expects the segment to close the year with 1-4 per cent growth, a slight moderation from the 4-6 per cent growth expected earlier.