Auto volumes are expected to rise 12-16 per cent year-on-year this fiscal, as against the earlier estimate of 16-20 per cent, India Ratings Research (Ind-Ra) said in its latest auto outlook.
The growth estimate has been revised downward on account of a revision in the growth forecasts for two-wheelers (2Ws) and passenger vehicles (PVs), Ind-Ra said.
The two-wheeler segment is now expected to log 10-14 per cent growth compared to the initial projection of 16-20 per cent, and the PV volumes segment may rise 15-18 per cent from the earlier forecast of 18 -22 per cent, it stated.
The growth forecast for commercial vehicles (CVs) is maintained at 20-25 per cent year-on-year, as per the report.
The rating agency also said it has maintained an improving outlook for the auto sector for FY22, as the revival across segments is expected to continue in H2 FY22.
The revival is likely to be aided by a recovery in consumer sentiments, increased preference for personal mobility and macroeconomic tailwinds, it said, adding rising fuel prices and another price hike by OEMs amid increasing input costs, continued supply chain constraints and any subsequent COVID waves could act as possible headwinds for the sector.
The downward revision in 2W volumes is mainly on account of reduced disposable income, especially of the buyers of entry-level segment amid the widespread impact of the COVID-19 second wave, deferral in reopening of colleges and workspaces, thus limiting travel as well as increased cost of ownership, Ind-Ra said.
While the demand fundamentals for PVs remain strong, growth would be constrained by supply chain challenges, especially the shortage of semiconductors, it said.
CVs could record high double-digit growth in FY22, despite the impact of the COVID-19 second wave, following a rebound in the indicators of economic activity in 2Q FY22. Ind-Ra also expects exports to grow in line with or marginally better than domestic sales growth in FY22.
Ind-Ra expects limited rating movements in the sector in FY22 and has thus maintained a stable rating outlook It also maintained its growth estimate for industry revenues at 16-20 per cent year-on-year during FY22, as the lower volumes would be set off by the price increases undertaken by original equipment manufacturers (OEMs).
However, the rating agency expects EBITDA margins to decline by 30-80 basis points year-on-year in FY22, mainly due to higher commodity prices and sourcing costs amid supply chain challenges.
These are likely to be passed on to customers by OEMs, although with a time lag. The decline would also be partly offset by improving operating leverage and lower discounts, it said.
Ind-Ra has maintained an improving outlook for the auto ancillary sector for the second half of this fiscal, and assigned a stable outlook on its rated portfolio for 2H FY22, as per its outlook on the auto ancillary sector.
The rating agency expects the sector revenues to grow 18-20 per cent year-on-year in FY22, supported by strong growth in demand from original equipment manufacturers (OEMs) and the export market.
Revenue will also be aided by higher realisations due to a likely rebound in medium and heavy commercial vehicles sales as well as pass-through of higher raw material prices, it stated.
Despite a lower FY22 OEMs sales volumes growth forecast of 12-16 per cent against the initial estimate of 16-20 per cent, higher exports and improved realisations are expected to keep the revenue growth estimate intact, the rating agency said.
However, profitability margins are likely to see a 50-100 basis points year-on-year contraction in the fiscal ending March 2022 due to increased input prices and supply chain disruptions, including the semiconductor chip shortage, despite better operating leverage, Ind-Ra said.
The agency said it expects Capex spending to resume in FY22, led by Capex deferrals from FY21, debottlenecking activities and expansions with committed offtake.
Ind-Ra also expects Capex intensity to increase in FY23 once capacity utilisations reach optimum levels on a year-round basis and that the sector's focus on cash flow allocation towards profitable assets to continue along with reducing exposure in loss-making ventures.
The pandemic-led supply chain disruptions have solidified the thrust on localisation for the sector. While the fine print is awaited, the performance-linked incentive scheme could create competitive advantages and growth opportunities for the segment in the medium to long term, according to the outlook.
Also, the introduction of the National Vehicle Scrappage Policy could lead to an uptick in demand, especially in the commercial vehicle segment; although the benefit from the policy would mainly accrue FY24 onwards, it added.
