Strong pre-buying before BS-VI norms kick in, an improvement in cash liquidity and a rise in disposable incomes will be major drivers of growth for the Indian auto sector in FY2020, rating agency India Ratings and Research (Ind-Ra) said on Wednesday, while maintaining a stable outlook for the upcoming fiscal.
The ratings agency, however, notes that overall domestic automobile sales are likely to remain tepid in the first half of FY20. But, the upcoming implementation of BS-VI emission norms from April 1, 2020, which will make vehicles significantly more expensive, is expected to push up demand in the second half of the year.
Ind-Ra also expects mid-single digit growth in passenger vehicle (PV) sales in FY 2020. Analysts at the agency observed that demand for PVs will remain subdued for the rest of the current finanical year amidst weak sentiment and no major launches. However, they also note that new launches will play a major role in the next financial year FY20 in driving sales and market share for automakers. But, the share of diesel-powered vehicles in overall PV sales is expected to continue to decline.
Meanwhile, for commercial vehicles (CVs), FY20 might not prove to be much better than the current year. Ind-Ra noted that during October-December 2018, tight liquidity conditions among non-bank financial companies (NBFCS) led to a decline in auto sales volume, especially in CVs.
“In FY20, Ind-Ra expects the liquidity of non-bank financial companies to improve, thus improving the funding availability; although not as much as pre-IL&FS crisis era. As a result, Ind-Ra expects sales volumes to improve from current levels, although growth rate is likely to be moderate,” it said. Ind-Ra estimates high single-to-low double-digit growth for the CV segment in FY20. Apart from improved finance availability, increased construction activities and industrial activities will continue to favour CV demand during the year, however.
For the key two-wheeler segment, a rise in rural incomes, a growing middle class population and tax rebates announced in the interim budget are expected to increase disposable income and drive sales growth during FY20. A young customer base is also expected to drive demand for premium products. However, chances of a scattered monsoon might impact demand for two-wheelers with high rural market exposure. The ratings agency maintains predictions of a steady growth in the two-wheeler (2W) segment on a year-on-year basis.
The BS-VI standard rollout set for April 2020 is seen as a key factor that will determine sales volumes across segments, with Ind-Ra noting that the fact that the rollout will make vehicles costlier could spur buying in FY20. “As per industry estimates, the cost of petrol variant PVs and two-wheelers could increase 10-15 per cent and that of diesel variant by 20-25 per cent,” it said.
BS-VI norms set to make vehicles pricey
- The cost of petrol variant passenger vehicles and two-wheelers are expected to increase 10-15 per cent come April, 2020
- Analysts also expect prices of diesel-powered models to increase by around 20-25 per cent post BS-VI rollout
no credit rating hit to cos
Ind-Ra says credit ratings of most large firms in its sample are set to be unaffected in 2019-20 despite capex plans in view of the ongoing regulatory changes and new product launches