Recovery momentum in automotive sector to decelerate: ICRA

KEY HIGHLIGHTS:

• Domestic two wheeler segment to witness a growth of 10-12% in fiscal 2022 against an earlier projection of 16-18%
• Passenger vehicle sales will also grow by 17-20% against 22-25% growth projection earlier
• Commercial vehicles growth has been revised to 21-24% against 27-30% on the low base of fiscal 2021
• Tractor segment, which has been the only outlier in the last few years, will also see flat growth this fiscal

The intensity of the second wave of pandemic is likely to take a toll on the country's domestic automobile sector which was poised for a strong double digit growth in fiscal 2022 over the low base of fiscal 2021. Credit rating agency ICRA has downgraded the prospects of each segment of the industry in view of the pandemic which has, unlike last year, spread significantly into the rural parts of the country as well.

The steepest downward revision of growth prospects is in the two-wheeler segment in fiscal 2022 where ICRA now believes growth will be in the range of 10-12 per cent against an earlier projection of 16-18 per cent. Similarly for passenger vehicles, growth would be 17-20 per cent against 22-25 per cent and for commercial vehicles it would be 21-24 per cent against 27-30 per cent. Even tractors, a segment that has continued to show strong growth even in the middle of the first wave of pandemic, is likely to stagnate this fiscal on the very high base of last year.

"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. Unlike the first wave, where infections were largely localised to urban clusters, the second wave has seen deeper and wider penetration, including into rural hinterlands," said Shamsher Dewan, Vice President & Group Head, ICRA Ratings. "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."

The domestic automotive industry was poised for recovery in the current fiscal after witnessing two challenging years in FY2020 and FY2021 on account of the domestic industry slowdown and pandemic-induced challenges respectively. The trends, in fact, had been quite encouraging from the second half of FY2021 onwards, with various automotive segments reporting healthy sequential recovery, post relaxation of the lockdown-related restrictions.

The biggest headwind for the industry is the spread of the virus to smaller towns and villages this time in addition to the sustained impact on disposable income and rising cost of vehicles. On top of these fundamental structural problems, the industry never expected that it would have to once again shut down factories and dealerships across the country for a protracted length of time. 

"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," Dewan said.

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