Another lockdown will hit automakers hard, affect capex plans: CARE Ratings

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 In the eventuality of another spell of a pan-India lockdown, the automobile sector will continue its downwards trajectory, which will seriously affect workforce and OEMs may have to further delay product launches and capex plans, CARE Ratings said in a report.

Several state governments have been announcing lockdown again in select areas for different time periods to check the Covid-19 pandemic amid rising numbers of infection cases in the country.

The automobile sector was already grappling with soft consumer demand in FY20. Additionally, the strict enforcement of government rules to adopt new emission standards led to original equipment manufacturers (OEMs) hiking their product prices which further deferred consumer purchases, Care Ratings said in the report on Wednesday.

Against this backdrop of an existing slowdown environment, the outbreak of Covid-19 in mid-March added to the woes of this industry.

Due to multiple lockdowns imposed in various states of the country in April and May, business and commercial activities came to a sudden standstill. The pandemic caused disruptions in supply chains and brought manufacturing activity to a halt for nearly 30 days, it said.

Due to the lockdowns, various OEMs, ancillaries and dealers located in containment zones witnessed almost zero activity in April and few days of May. However, with gradual relaxations on restrictions in movement of people in June, manufacturing activity witnessed an improvement during the month, it said.

With this, automobiles production, sales as well as exports sequentially rose in June, after two consecutive months of decline, it added.

"Outlook for this (automobile) sector continues to remain grim with no definite signs of improvement in the near future. If another nation-wide lockdown gets imposed, the sector will continue the downwards trajectory, which will seriously affect large workforce and OEMs may have to further delay their product launches and capex plans.

"In such a scenario, greater marketing initiatives such as discounts or bundling of offers for consumers could be expected," Care Ratings said in the report.

Following zero sales in April and partial resumption of operations in May and June, passenger vehicle (PV) sales plunged 78.43 per cent to 1,53,734 units in April-June 2020 as compared with 7,12,684 units in April-June 2019, according to the Society of Indian Automobile Manufacturers' (SIAM) data.

Consumer sentiments have remained low since the past 4-5 quarters now, which is evident in the falling automobile sales numbers of commercial and passenger vehicles as well as and two and three-wheelers, where the latter performed marginally better than the former two, Care Ratings said.

The on-going rise in fuel prices is expected to further delay the consumer's decision of purchasing an automobile, it said.

Rising fuel prices is expected to act as a key pain point for automobile sector in the short-term, it added.

According to the report, being capital as well as labour intensive, automobile manufacturers incur high fixed as well as variable costs, therefore, improvement in capacity utilisation is one of the important levers for growth in margins of OEMs.

However, in April and May, both sales volumes as well as capacity utilisation fell much below the pre-Covid levels. These two factors, along with high sales promotion expenses are likely to negatively impact margins of automobile OEMs in Q1 FY21.

Companies could partially off-set the impact by increasing cost reduction measures, it said.