Covid’s second wave is expected to dent auto ancillaries’ revenue in 1QFY22, said India Ratings and Research (Ind-Ra).
The ratings agency believes that auto ancillaries would see a materially lower revenue in 1QFY22, following a strong turnaround in 2HFY21.
“The second Covid wave leading to localised lockdowns has impacted the economic activity, resulting in shutdowns/advancement of maintenance activities at original equipment manufacturers’ (OEMs) plants, causing lower volume offtake from ancillaries,” it said.
Besides, the agency opined that industry will see a pent-up demand in the subsequent quarters if the lockdowns are lifted from end-June which could compensate for the loss of revenues in 1Q.
“Nevertheless, export demand remains buoyant, and could offer some respite to auto ancillaries during 1Q, as well as support revenue growth in the remaining quarters.”
Ind-Ra also expects a bounce back in the aftermarket demand once the lockdowns are eased.
“However, in case, the lockdowns or restrictions remain in force for a longer duration, there could be a downside risk to Ind-Ra’s revenue growth estimate of 18-20 per cent YoY for FY22.”
“The focus on cost-cutting measures and better cash flow generation over 2HFY21, and availability of financing through the lower cost ‘Emergency Credit Line Guarantee Scheme’ loans in FY21 have resulted in a better liquidity profile for sector companies vs a year ago levels.”
Furthermore, the agency said it does not foresee any major negative rating actions unless there is a material stress to the credit profiles of the rated entities.
“Ind-Ra expects that sector revenues in 1QFY22 would be 50-60 per cent of those recorded in 3Q-4QFY21, while also remaining exposed to downside risks relating to the instances of infections and severity of restrictions.”
“In case restrictions remain for a prolonged period, the consumer sentiment could falter as the disposable incomes would decrease as well as delay the recovery of economic activity.”
Moreover, it noted that with a large number of dealerships remaining closed, many OEMs have taken production shutdowns in April and May to keep vehicle inventory from rising further.
“This has caused a sudden fall in demand for auto ancillaries post strong volumes in 3Q-4QFY21.”
As per Ind-Ra’s discussions with the rated auto ancillary portfolio, the capacity utilisation which was tracking at 90-95 per cent levels in March 2021 due to a pick-up across vehicle segments, declined to 80-90 per cent in April, and is likely to have fallen further to 55-60 per cent in May 2021, due to state-wise restrictions which came into effect only in the latter part of April, and manpower being exposed to Covid infection, combined with OEM shutdowns.
“Ind-Ra expects the domestic demand in June could be similar to May. The aftermarket demand also remains adversely impacted on account of the lockdowns.”