COVID-19 spread to add to woes of auto ancillaries and OEMs: Survey

By: |
Published: March 19, 2020 1:40:03 AM

While certain plants have reopened in the region, their capacity utilisation levels and time taken to resume operations are key monitorables.

Against the backdrop of falling domestic sales and continuing margin pressure, any supply-side shocks could affect the credit metrics of the companies in the sector. (Representative image)Against the backdrop of falling domestic sales and continuing margin pressure, any supply-side shocks could affect the credit metrics of the companies in the sector. (Representative image)

The continued spread of coronavirus will negatively impact the domestic auto industry in the near term as Wuhan, the epicentre of the outbreak in China, is a major manufacturing hub for automobile and auto parts. Furthermore, the sector would face pressure not only from the supply side but also exports, if the spread of virus persists for more than two months, globally or domestically, said India Ratings and Research (Ind-Ra) in its analysis released on Wednesday.

Indian auto ancillaries and original equipment manufacturers (OEMs) are about 27% dependent on China for import of key parts and accessories. The extended production halts in China after the Chinese New Year due to a substantial rise in virus cases have created supply-side risks for domestic auto companies.

Against the backdrop of falling domestic sales and continuing margin pressure, any supply-side shocks could affect the credit metrics of the companies in the sector.

Ind-Ra’s base case estimates peg that a sustained supply chain issue could increase the median net leverage of domestic producers by at least 0.3x due to the potential margin contraction and asset turnover pressure.

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 — passenger vehicles, commercial vehicles and two-wheelers. Furthermore, the transition to BS VI and constant premiumisation of vehicles have increased the reliance of OEMs on the import of technologically advanced products. This could be seen from a 10% y-o-y increase in imported components such as steering and braking systems, engine parts, electronic components, fuel injection parts and alloy wheels, Ind-Ra analysis said further.

Importantly, any disruption related to a single component being exclusively or largely imported from China would significantly affect the entire chain of OEMs, tier I suppliers and tier II suppliers. With over 80% of the imported components in two-wheelers and truck-trailers are from China, the reliance on imported content is higher in the segment than other auto peers and hence, it is likely to be impacted more. In other segments such as cars, buses and commercial vehicles, Chinese import concentration ranges between 17% and 25% of the total imports, it added.

While certain plants have reopened in the region, their capacity utilisation levels and time taken to resume operations are key monitorables.

In case of tyres, imports from China constituted 25% of the total imports during FY19 with a higher proportion particularly in truck and bus radial. A supply shock in case of tyres will be positive for domestic tyre manufactures, especially those catering to the segment. Furthermore, many domestic tyre manufacturing companies have expanded their capacity during FY19-FY20; hence, an import gap would improve the capacity utilisation of these companies.

However, this is likely to be somewhat offset by the challenging situation in the domestic market if there are more shutdowns, not just by OEMs, leading to lower volume intake, but also by other industries limiting the movement of vehicles, and hence, the demand for tyres.

In a scenario of disruption in the supply of key components, the industry could look at sourcing them either locally or from other countries such as Germany, South Korea, Japan and Thailand, who currently account for around 33% of the total imports. However, the change in procurement channels could be costlier and the supply could be insufficient to meet the demand, the Ind-Ra analysis pointed out.

The SARS outbreak, which also originated in China during FY03, led to around 100 basis point margin contraction among Indian auto parts manufacturers on an aggregate basis. However, the intensity of COVID-19 is much greater than that of SARS and China’s position in the global automobile market has also become more prominent now than in FY03. Hence, if the containment of the spread remains elusive, then the margin impact could be over 100 bp in Q4FY20-Q1FY21 and subsequently, the credit metrics could come under further pressure.

The issuers in the agency’s rated portfolio have adequate inventory until March-April 2020 for key imported items; hence, any near-term issues stemming from supply-related challenges are limited. However, the volume offtake of auto ancillaries may decline due to an overall decline in the vehicle production as OEMs take production cuts due to supply-side challenges of certain components.

Furthermore, as the COVID-19 outbreak has now spanned across all continents except Antarctica, the global consumption is likely to be affected at least in the near term, posing challenges to export-oriented auto ancillary companies as well. If the virus spread is not contained timely, imports from other key geographies and exports to countries such as the US and the UK could also be impacted.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1COVID-19 impact: OnePlus postpones OnePlus 8 Pro, OnePlus 8 India sales indefinitely
2Covid-19 crisis: ‘Indian banks need $20 billion in fresh capital’
3IDFC First Bank to give 7% interest on savings account opened through video KYC