‘Auto sector’s demand conditions likely to persist’

The subdued demand conditions that led to weak performance by Indian automakers in the first quarter of 2019-20, will likely persist, adding to the challenges from the implementation of stricter emission norms under BS6 from April 2020, Fitch Ratings said on Monday.

However, Fitch Ratings pointed out that government's focus on improving liquidity and recent measures to revive auto sales will stabilise volumes in the coming quarters.

The research note assumes significance as it comes days after Finance Minister Nirmala Sitharaman gave a major boost to the automobile industry by announcing a slew of measures to reverse slowdown denting the sector.

"We expect overall domestic auto sales volume to decline in FY20, although volumes may stabilise in the coming quarters due to government's focus on improving liquidity at lenders and recent measures to revive auto demand," Fitch Ratings said.

"The improved likelihood of adequate rainfall and recent cut in interest rates should also help demand in 2HFY20. However, the lower volumes will weigh on automakers' profitability in FY20 and could offset the benefits from lower commodity prices."

Last Friday, Finance Minister Nirmala Sitharaman gave a major economic boost to diverse sectors such as NBFCs, auto, housing, MSMEs, equity markets and banking via a slew of measures on tax surcharge, GST refunds, easier loans and demand generation.

In terms of auto sector, Sitharaman allowed government departments to purchase new vehicles to replace old ones.

She further announced that all vehicles purchased till March 31, 2020 shall avail of the benefit of additional depreciation of 15 per cent. It shall increase the higher depreciation on all vehicles to 30 per cent.

The minister said that BS IV vehicles purchased till March 31, 2020 shall remain operational for the entire period of their registration.

She clarified that registration for both ICE and EV vehicles will continue.

At present, the sector has been impacted by a consumption slowdown which is a culmination of several factors such as high GST rates, farm distress, stagnant wages and liquidity constraints.

Besides, inventory pile-up at the dealership level and stock management of unsold BS-IV vehicles have become a problem for the sector.