Strong balance sheets may help maintain car makers credit quality: Crisil

Crisil rates six of these OEMs, which accounted for about 73 per cent of the sales volume in fiscal year 2020
Strong balance sheets and healthy liquidity position are expected to help maintain credit quality of most of the passenger vehicle (PV) makers stable despite the likely 25 per cent fall in sales for the segment in 2020-21, ratings agency Crisil said in a report Thursday.

As one of the many fallouts of the coronavirus pandemic on automobile industry, pre-owned vehicles and new small PVs may find increased preference in FY21, it said.

The agency had earlier said that PV sales, including exports, are expected to plunge by almost a quarter (22-25 per cent) in FY21 to a decadal low of around 26.5 lakh units, which would be the second straight year of double-digit volume decline after the 15 per cent drop in sales in previous fiscal.

"The credit quality of most passenger vehicle (PV) makers (original equipment manufacturers, or OEMs) would remain stable because of strong balance sheets and healthy liquidity (despite 22-25 per cent fall in sales)," the report said.

"In some cases, support from strong parent/group will help navigate the rough terrain," it added.

The ratings agency said it analysed eight PV makers (including two that are into diverse segments), accounting for around 80 per cent of industry sales volume.

Crisil rates six of these OEMs, which accounted for about 73 per cent of the sales volume in fiscal year 2020.

"The eight PV makers had around Rs 50,000 crore of surplus liquidity as of March 2020, which will help them tide over these difficult times," Crisil Ratings Associate Director Aparna Kirubakaran said.

"Also, the average debt-to-Ebitda of these players is estimated at around 1.1 time at end of last fiscal. This ratio is likely to go up, but remain adequate at close to 2 times by end of fiscal 2021, supported by pruning of capital spend by at least around 25-30 per cent," Kirubakaran added.

The ratings agency has assumed around 60 per cent fall in domestic dispatches in the first half of this fiscal, in line with staggered opening of dealerships from May 2020, followed by a 6-8 per cent revival in balance half of the fiscal, driven largely by improved rural demand.

This along with around 15 per cent drop in export volumes will lead to around 22-25 per cent fall in overall sales volume in fiscal 2021, it said.

"With muted income growth, discretionary spending will take a backseat this fiscal. Small PVs and used vehicles will find favour owing to better affordability," Crisil Ratings Senior Director Anuj Sethi said.

"Also, given increasing awareness about social distancing, consumers may reduce, if not avoid, travel by public, pooled and shared transport in the short term. However, the benefit from change in commuting-pattern will only partly offset the steep downturn," he added.

According to the report, the operating profitability of PV makers will be curtailed this fiscal because of production loss during the lockdown, fixed overheads and lower operating rates, notwithstanding soft input prices and pruned marketing spends.

PV makers will continue offering discounts through the first half, and partly absorb higher cost of BS-VI variants given the tepid demand.

The impact of this will be around 150-200 basis points, with operating profitability settling at 6-7 per cent this fiscal for the sample set, owing to low operating leverage, with around 80 per cent of cost pertaining to raw materials, it said.

The extent of the Covid-19 pandemic, and ability of component supply chain and automotive dealerships to stabilise operations will remain key monitorables, the report said.

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