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The domestic commercial vehicle industry volumes are expected to contract further by 25-28 per cent in FY2021, rating agency ICRA said on Thursday.

The rating agency has maintained a negative outlook for the segment over the near term, saying that headwinds continued from all fronts, including financing availability, macroeconomic environment, regulatory developments or fleet operator health.

"The situation has been further aggravated by the rapid spread of novel coronavirus in India. Demand headwinds are expected to continue over the near term given the macroeconomic challenges in view of the pandemic outbreak, coupled with weakening financial profile of fleet operators and significant price hikes because of transition to BS-VI emission norms," ICRA said in a statement.

"Additionally, the lockdowns imposed in the country from end of March 2020 have added production constraints to the on-going set of challenges."

As per the statement, the only limited green shoot visible is the uptick in rural demand, which augurs well for the LCV (Truck) segment, although ability to recoup lost sales of Q1FY21 remains to be seen.

"Accordingly, the domestic CV industry volumes are expected to contract further by 25-28 per cent in FY2021, which would bring industry volumes to the lowest levels in more than a decade. Although ICRA believes growth would be optically better in FY2022 at 24-27 per cent, the recovery to industry volumes of even FY2017 levels would remain some time away," the statement said.

"Overall, these headwinds are expected to exert pressure on earnings and credit profile of CV OEMs, which have witnessed sharp earnings contraction over the past 4-5 quarters."

According to the statement, the sharp volume and revenue contraction and resultant negative operating leverage would exert significant pressure on the earnings and credit metrics of CV OEMs during the current fiscal, after a year of relatively subdued performance.

"These pressures are expected to continue at least over the next couple of quarters, before recovery sets in," the statement said.

"Accordingly, ICRA has a Negative outlook on the industry and on three out of five rated entities in the sector, given expectations of a weakening credit profile. For the other two rated entities, ICRA believes that their robust balance sheet and liquidity position would help tide over this phase, despite a temporary moderation in credit metrics."

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