Delinquencies to increase in auto sector: Icra

Motorcycles, entry level cars and used vehicles segments will see growth this year. Certain entry level cars are witnessing waiting period while prices in the used cars have increased, Modani said.

By:Updated: Oct 15, 2020 11:25 AM
Citing a pick-up in sales of some auto segments like passenger vehicles and two-wheelers in August, he said the sector was already on a revival path.

 

Delinquencies in passenger vehicles and commercial vehicles are on the rise, according to ratings agency Icra. The trend had been masked due to moratorium on repayments. There could be an increase in delinquencies in the months ahead and repossession of vehicles will go up especially in commercial vehicles segment as fleet operators are under severe stress. While demand was slowly returning  to normalcy and there was sequential recovery across all automotive sub-segments, increased risk aversion in retail as well as wholesale financing remained a deterrent. Capacity utilisation will dip below 45% in FY21and incremental capex will cut by 35% to 45% in the PV industry, says Icra. For the CV industry, capacity utilisation has declined to 36% while capex has been curtailed by 64%. This is the
lowest capacity utilisation in 10 years, points out Icra.

According to Ashish Modani, VP, Icra, rural markets would be the key driver of volumes in FY21, with entry level cars and utility vehicles benefiting. The share of rural in new passenger vehicles is around 35% to 40% currently. Motorcycles, entry level cars and used vehicles segments will see growth this year. Certain entry level cars are witnessing waiting period while prices in the used cars have increased, Modani said. The industry would have
flattish to moderate growth in the passenger vehicle segment as the rejection rate by financiers has increased. Luxury cars, midsized sedans and diesel vehicles have a rough road ahead, he added. The share of diesel cars is expected to go down from 11% in FY20 to 5% to 7% in FY22 while in the UV segment, diesel share will decline to 30% to
40% from 65% in FY20. Midsize sedans are seeing high discounts while luxury car volumes could decline by  40% in the current year, he said.

Shamsher Dewan, VP, ICRA, said delinquencies in the CV segment could be around 6% to 8% and re-possession would go up if fleet operators were not able to sustain. Around 70% to 75% of CV loans had opted for moratorium, he said. Fleet operators are in stress as fleet utilization was dismal while fuel costs were rising impacting operatorviability, Dewan said. The financing environment has turned cautious and is expected to tighten further, he
said. These condhand CV market was showing a healthy demand and prices had gone up as small fleet operators are opting to buy older vehicles, Dewan said. CV sales remain severely impacted and as against a monthly sales of 80,000 plus units prior to the pandemic, CV retail sales was at less than 40,000 in September 2020, the
ratings agency said. The outlook for buses, medium and heavy commercial vehicles was negative with a significant impact on capacity utilization which is expected to be at 36% in FY21 leading to a curtailing of capex spends from Rs 6,700 crore in FY20 toRs 2,400 crore in FY21. According to Dewan, there was a recovery in LCV sales with 35% to 40% of these sales happening in semi-urban and rural areas and because of demand from the FMCG and e-commerce players.

The only challenge was delinquencies post-moratorium and how financiers react to it, Dewan said. The loan to value ratio was decreasing, approvals were taking a longer time and lenders had turned cautious, he said. The auto component industry revenues are expected to contract by 14% to 18% during FY21. Icra said demand from OEMs was estimated to fall by around 20%, replacement demand would go down by 10-15% and global automotive markets are expected to contract by over 20% impacting exports. Operating margins are expected to contract by over 225 bps to 10.9% in FY2021. The auto ancillary sector’s capital expenditure as a percentage of sales is likely to decline below 5% for first time in last 10 years. Capital expenditure for Icra’s sample of large auto ancillaries declined from 6.3% in FY20 to 4.8% in FY21 and for tyre makers, it had declined from 20.7% in FY20 to 6.3% in FY21. Commodity prices, which have stayed accommodative in H1FY21, are expected to increase in H2FY21 and will adversely impact margins in the auto component industry. Prices of steel, aluminium, copper, lead and rubber have inched up higher in the past month and will add to commodity price pressure for ancillaries.

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