Ind-Ra maintains improving outlook for Automobile sector, but revises volume growth forecast downwards

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Biznextindia : India Ratings and Research (Ind-Ra) has maintained improving outlook for the auto sector but revised volume growth downwards to 12%-16% from 16%-20% for the second half of the current financial year (FY22). The revision is due to downward revision of growth forecasts of both two-wheeler and passenger vehicles.

Two-wheeler sales are estimated to be impacted due to reduced disposable income of entry-level buyers, COVID-19 impact and deferral in reopening of collages, while growth in passenger sales is likely to be constrained by the supply chain challenges especially shortage of semi-conductors.

The Ratings Agency has maintained an improving outlook for the auto sector for FY22 as the revival across segments is expected to continue in 2HFY22, aided by a recovery in consumer sentiments, increased preference for personal mobility and macroeconomic tailwinds. However, Ind-Ra has revised auto volumes growth forecast to 12%-16% yoy from the initial growth forecast of 16%-20% yoy. The downward revision is mainly on account of a revision in the growth forecasts for two-wheelers (2Ws) and passenger vehicles (PVs) to 10%-14% (initial estimate: 16%-20%) and to 15%-18% (initial estimated: 18%-22%), respectively. Growth forecast for commercial vehicles (CVs) is maintained at 20%-25% yoy for FY22.

“The downward revision in 2W volumes is mainly on account of reduced disposable income especially of the buyers of entry-level segment amid the widespread impact of Covid 2.0, deferral in reopening of colleges and workspaces thus limiting travel as well as increased cost of ownership. While the demand fundamentals for PVs remain strong, growth would be constrained by supply chain challenges especially shortage of semi-conductors. CVs could record high double-digit growth in FY22, despite the impact of Covid 2.0 following a rebound in the indicators of economic activity in 2QFY22. Ind-Ra also expects exports to grow in line with or marginally better than domestic sales growth in FY22” Ind-Ra said.

Ind-Ra expects limited rating movements in the sector in FY22 and has thus maintained a Stable rating Outlook. Ind-Ra maintains its growth estimate for industry revenues at 16%-20% yoy during FY22, as the lower volumes would be set off by the price increases undertaken by original equipment manufacturers (OEMs). However, Ind-Ra expects EBITDA margins to decline by 30-80bp yoy in FY22, mainly due to higher commodity prices and sourcing cost amid supply chain challenges. These are likely to be passed on to customers by OEMs, although with a time lag. The decline would also be partly offset by improving operating leverage and lower discounts. Credit metrics are likely to remain flat to improving marginally in FY22. Margins and credit metrics of CV players are likely to witness a higher improvement than the industry due to the weaker base in FY21. Refinancing risk is low for the industry and there is adequate rating headroom.

The rising fuel prices, OEMs mulling for another price hike amid increasing input costs, continued supply chain constraints and any subsequent covid waves could act as possible headwinds for the sector.

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