Ratings agency ICRA in its latest report said that the Passenger Vehicle (PV) segment's FY21 volumes are expected to see a 22-25% drop, as its fortunes are tied to GDP growth rate and overall consumer sentiment, both of which are currently at historic lows. "This recessionary environment has resulted in purchase deferrals," ICRA said.

However, the agency also expected the PV industry volumes to witness a strong double-digit growth in FY2022. "This will be after two consecutive years of negative growth at (-17.9%) in FY2020 and (-22 to -25%) in FY2021. The fall in demand is also being reflected in capacity utilisation, which is likely to dip below 45% in FY2021, from 50-55% in FY2020," ICRA said.

Consumer sentiment has been hit for a while by a gradual fall in economic activity, and the automobile sector has bore the brunt of it. The industry, which contributes more than 7% to the country's GDP, has been registering de-growth for almost two years. Last year, in September, for instance, the PV segment saw a decline of 23.69% and sold 2,23,317 vehicles.

Also, during the middle of last year, data from Society of Indian Automobile Manufacturers (SIAM) showed that PV sales for July 2019 had fallen significantly by 31%. This was the sharpest fall in 19 years.

The Covid-19 pandemic has only exacerbated this. The economic turmoil it brought forth, prevented buyers from investing in big-ticket purchases. The lockdown not only disrupted supply chains but also forced people to delay spending.

According to estimates from Centre for Monitoring Indian Economy, over 122 million people in India lost their jobs in April 2020 alone.

The ICRA report notes that while the industry's long-term drivers are intact, but compared to the Chinese and other key global markets, the domestic market is witnessing a slower-paced recovery.

According to the automobile dealers’ body FADA, PV retail sales in May declined 86.97% to 30,749 units, as compared to the same month last year. September, however, saw a slight growth due to pent up demand, and the fact that there is a shift in customer preference for personal mobility over public transport due to the pandemic. Retail sales in September witnessed year-on-year increase of a meagre 9.81% to 1,95,665 units.

"There is an increased risk aversion in retail as well as wholesale financing, which is a deterrent," Ashish Modani, vice president, ICRA, said.

Modani feels that the rural market will be the key driver of volume in FY2021, which will benefit with entry level cars and utility vehicles (UV).

"Buyers may opt for 2W or used cars to avoid public transport. The share of diesel vehicles is expected to decline below 40% in UVs in the next two years, and some manufacturers have already exited the diesel portfolio completely," he said.

Another ongoing trend, according to ICRA, is the rise in delinquencies in the passenger and commercial vehicle segment. "Delinquencies in the CV segment could be around 6% to 8% and re-possession would go up if fleet operators were not able to sustain. Around 70% to 75% of CV loans had opted for moratorium," Shamsher Dewan, vice president, ICRA, said.

According to Dewan, fleet operators are in stress as fleet utilisation was dismal, while rising fuel costs were impacting operator-viability. Due to this, the financing environment has turned cautious and is expected to tighten further.

When it comes to commercial vehicles, which registered a monthly sales of more than 80,000 prior to the pandemic, has now fallen to 40,000 in September 2020. "The outlook for buses, medium, and heavy commercial vehicles was negative with a significant impact on capacity utilisation, which is expected to be at 36% in FY21, leading to a curtailing of capex spends from ₹6,700 crore in FY20 to ₹2,400 crore in FY21," the ratings agency said.

Dewan, however, pointed out that there was a recovery in the light commercial vehicle segment, with sales from 35% to 40% happening in semi-urban and rural areas, all because of demand from the FMCG and e-commerce players.

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