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Automotive Product Finder Magazine | Can auto industry recover from COVID 19 shock?
Can auto industry recover from COVID 19 shock?
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As the auto industry makes a shift to the BS VI regime from April 1, auto makers were expected to liquidate the remaining BS IV inventory triggered by pre-buying in the last quarter of the fiscal year. However, Covid 19 has aggravated inventory pain for OEMs and dealers, especially of two-wheelers. According to CRISIL Research report, a recovery across the automobile sector, including components, is not expected in fiscal 2021.
The Indian automobile industry appears to be caught in a cleft stick over emission guidelines as the deadline draws near amid the havoc wreaked by the Novel Coronavirus disease (Covid 2019). Original equipment manufacturers (OEMs) and dealers are required to liquidate their Bharat Stage (BS) IV inventory by March 31 and shift to the BS VI regime from April 1. However, with footfalls drying up due to the pandemic, they are looking at huge unsold inventory. CRISIL Research’s interaction with dealers across India indicates the situation is more worrying for two-wheelers than for passenger vehicles (PV), light commercial vehicles (LCVs), and medium and heavy commercial vehicles (MHCVs).
Inventory piles up
The automobile industry was saddled with sizeable inventory after one of its worst years in two decades last fiscal. Volumes logged double-digit decline across segments as headwinds – insurance norms, safety regulations, price hikes, new axle load norms, and liquidity crisis, to name some – in the second half of the fiscal resulted in higher than-normal inventory.
To make matters worse, demand took a beating as the economy faltered. In fiscal 2020 many OEMs took multiple production cuts to correct BS IV inventory at the dealer end, to ensure a smooth transition to BS VI.
Pre-buying in the last quarter was expected to help liquidate the remaining BS IV inventory. However, the rapid rise in Covid-19 cases in India over the past few days has dealt a death blow to retail sentiment.
With just a few days to go in fiscal 2020, two-wheeler dealers are anxious as they are saddled with huge BS IV inventory, and are offering higher than normal discounts – around twice the festive season discounts – to encourage pre-buying. Interestingly, OEMs that transitioned to BS VI models in the third quarter this fiscal are impacted less by the BS IV inventory pile-up.
Dealers of PVs and MHCVs are more comfortable with the transition as they have manageable BS IV inventory. PV dealers are not offering discounts, though their CV counterparts – especially those dealing in LCVs – are expected to offer high discounts to liquidate the remaining BS IV vehicles.
The Covid-19 effect
To be sure, most OEMs in the PV segment had rationalised their BS IV inventory by February-end and synchronised the launch of BS VI variants. Larger ones also offloaded sound wholesale BS VI inventory at the beginning of March to meet year-end targets, expecting higher retail volumes in March.
Then the Covid-19 rage intensified, drying up enquiries and footfalls, and resulting in lower-than-anticipated retail offtake. In its wake, dealers in certain regions have been asked to stay shut or operate with minimum employees.
The registration front throws up some interesting nuances, too. Some regional transport offices (RTOs) are advocating quicker BS-IV registration process in anticipation of early closure if Covid-19 cases surge. This has severely hit the planned offtake of the remaining BS IV inventory as well as sale of new BS VI inventory. Theoretically, it is possible to process same-day registration from RTOs through the online portal VAHAN.
However, market interactions indicate the RTOs have informed about assured registration of BS IV models only if the registration process is initiated by March 25.
CV dealers – especially MHCV dealers – have reserved BS IV registration tokens for make-to-order BS IV deliveries (February-approved orders) to avoid registration issues.
However, financiers are hesitant to process loans after March 21 without dealer assurance of registration before March 31.
To boot, the Covid-19 impact is severe in Maharashtra, Karnataka, Odisha and Kerala, which have seen 40-50 per cent drop in footfalls, enquiries and deliveries; moderate in Gujarat, West Bengal, NCR and Punjab; and nominal in Rajasthan, Chhattisgarh and Bihar. The lone silver lining is that the offloaded BS VI inventory can be sold in subsequent months.
Long drive to recovery
Covid 19 is expected to land a double whammy on the sector. First, earlier-than-anticipated closure of RTOs could lead to unsold BS IV inventory. And second, lower-than-anticipated retail sales would result in higher-than-normal BS VI inventory for large PV OEMs at the start of fiscal.
Overall, the dynamics around Covid-19 remain the key monitorable. While BS VI inventory has piled up with dealers because of low footfalls, plant shutdowns by leading OEMs such as Maruti, Hyundai and Bajaj will have an offsetting impact.
However, despite the low base forming, we do not expect a recovery across the automobile sector, including components, in fiscal 2021.
About the author:
Hetal Gandhi is the Director of CRISIL Research, and can be contacted on email: firstname.lastname@example.org Pushan Sharma is the Associate Director of CRISIL Research, and can be contacted on email: email@example.com This article originally was published as part of “CRISIL Impact Note” on automotive industry on March 23, 2020
Indian Automobile Industry
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