India Ratings and Research (Ind-Ra) has recently said that the continued spread of Covid-19 or the Coronavirus would negatively affect the Indian auto industry in the near term. The reason why it thinks so is that the Chinese city Wuhan – that is the epicentre of the Coronavirus outbreak – is a major manufacturing hub for automobile and auto parts. Moreover, the agency believes the sector would face pressure from not only the supply side but also the demand side and also exports, if the spread of Covid-19 persists for over two months – both domestically and globally, Ind-Ra has said in a statement.
Going into the figures, Indian auto ancillaries and original equipment manufacturers (OEM) have about 27 percent import dependence on China for key parts and accessories. With the substantial rise in Covid-19 population, the extended production halts in China after the Chinese New Year have created supply-side risks for domestic auto companies.
Moreover, against a backdrop of falling domestic sales and continuing margin pressure, any supply-side shocks could affect the credit metrics of sector companies under further strain. “Under Ind-Ra’s base case estimates, a sustained supply chain issue could increase the median net leverage of domestic producers by at least 0.3 times due to the potential margin contraction and asset turnover pressure,” it said.
“Wuhan domiciles the manufacturing plants of certain leading global auto component manufacturers supplying to OEMs. Being the epicentre of the pandemic, a major supply chain disruption for key auto components is likely across vehicle segments, like passenger vehicles, commercial vehicles and two wheelers,” it said. “Furthermore, the transition to Bharat Stage–VI and constant premiumisation of vehicles has increased the reliance of OEMs on the import of technologically advanced products. This could be seen from a 10 per cent year-on-year increase in imported components such as steering and braking systems, engine parts, electronic components, fuel injection parts, and alloy wheels,” it said.
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