Second Covid wave dents auto sector's recovery momentum: ICRA

The second wave of Covid-19 has dented the recovery momentum of automobile sector's Original Equipment Manufacturers (OEMs) and auto-ancillaries, said ratings agency ICRA.

"Not only have many auto OEMs and auto ancillaries resorted to plant shutdowns as a restrictive measure, but also automotive dealerships across regions have not been operational in light of regional restrictions imposed by various states and local authorities in order to curb the pandemic," the ratings agency said.

As per an ICRA note, while these trends would cause near-term supply disruptions in the sector, the larger and prolonged impact will be on various demand drivers.

Consequently, the ratings agency revised the growth estimates for most of the different automotive segments downwards.


According to Shamsher Dewan, Vice President & Group Head, ICRA Ratings:
"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."

"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."


Besides, the agency cited that within the industry, two-wheeler segment is expected to be the most impacted, with the target consumer group'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.

Furthermore, 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 and will see a lower growth of 17-20 per cent now as against 22-25 per cent expected earlier.


In terms of commercial vehicle (CV) segment, ICRA said the Medium and Heavy Commercial Vehicles (M&HCVs) would see relatively lower impact from the second wave of the pandemic, as construction and mining activities continue largely unimpacted so far.

However, it pointed out that 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 the increased restrictions and wariness.

Additionally, the bus segment, ICRA said, would continue to be severely impacted due to wipeout of the seasonal demand from schools, increased prevalence of work-from-home practices, weak tourism prospects and a general aversion to public transportation.


Overall, the CV segment is expected to grow by 21-24 per cent in FY2022 now, as compared to 27-30 per cent that was expected earlier.

Similarly, tractor segment, 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.

Moreover, 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, ICRA said.

The agency 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.

"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," Dewan said.

"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." - IANS