India's commercial vehicle industry is looking at a six-fold increase in net loss as the coronavirus pandemic and the subsequent lockdowns take a toll on already weak sales.Commercial vehicle manufacturers would suffer Rs 6,000 crore net loss this fiscal on the back of 20 per cent decline in sales volume on an already weak base, according to a report by CRISIL. Volumes might hit their lowest point in 10 years.
The ratings agency considered Mahindra and Mahindra, Tata Motors, Ashok Leyland and VE Commercial Vehicles for this survey. These companies comprised around 90 per cent of industry volumes in the last financial year.
Amid fears of sales volumes dropping to lowest levels in 10 years, the report cautioned that operating margins in the segment could dip to near-zero levels as manufacturers might partially absorb BS-VI upgrade costs to stimulate demand.
"Two consecutive years of high de-growth are likely to result in CV volume reaching its lowest point in 10 years. With utilisation down to a third, high fixed costs would dent the profitability of CV makers. Moreover, manufacturers may partly absorb BS VI upgrade costs in their quest to stimulate demand. That could drive down segment operating margins to near-zero from an already low 6% in fiscal 2020, and increase losses," said Manish Gupta, Senior Director, CRISIL Ratings.
Combined with a stretch in working capital due to support extended to dealers and suppliers, could result in sizeable negative cash flows and thus ballooning debt, CRISIL said. While this may constrain credit metrics in the current fiscal, credit profiles of manufacturers will be supported by strong balance sheets and comfortable cash buffers, it further added.
Indian auto industry was already facing an unprecedented slump in sales even before the ongoing pandemic. Commercial vehicle makers were already impacted by new overloading norms and a slowing economy when the COVID-19 pandemic arrived. This had resulted in a 29 per cent decline in sales volume during fiscal 2020, the agency said.
In the June quarter of this fiscal, sales volume further declined 85 per cent because of the coronavirus lockdown. The resultant sharp slowdown in industrial activity has hard-braked sales of medium and heavy commercial vehicles (MHCVs), which account for two-thirds of industry revenue, CRISIL noted. Sales of light commercial vehicles (LCVs) may fare better with support from the rural economy and private consumption, it further added.
Companies will look to reduce stress across the value chain and help key stakeholders rebound next fiscal, leading to further stress in cash flows, the ratings agency said. They might provide dealers leeway on payment terms and make timely payments to auto-component suppliers. That would temporarily increase the working capital requirements and raise the industry's debt by almost a third to Rs 40,000 crore this fiscal, the agency warned.
Consequently, credit metrics of the sector would be constrained, but credit profiles will be supported by strong balance sheets and expectation of a bounce-back next fiscal.
"The pandemic struck when the industry's gearing was 0.5 times - a shade lower than the year before the previous downturn in 2014. Despite the rise, we expect the gearing to be comfortable at 0.7 times by the end of the current fiscal. Manufacturers also have comfortable cash liquidity of nearly 2 times debt servicing needs," said Naveen Vaidyanathan, Associate Director, CRISIL Ratings.
While rising debt and weak profitability may constrain interest cover to nearly 1.5 times this fiscal from an average 7.1 times in the past 5 years, the number should recover next year with sales volume, CRISIL stated. Hopes for recovery are based on an expected pick-up in both, industrial activity and private consumption.
Commercial vehicles are a critical logistical link to the economy and hence sales volume is likely to bounce back next fiscal to reach almost fiscal 2020 level. That would substantially pull up the profitability of manufacturers, reverse the working capital stretch and restore credit metrics, the agency said.
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