View from India: Auto industry gears up for a green journey

India’s auto industry has had a bumpy ride, but it is all set for a revival after two tough years.

Revenues, which were significantly impacted in fiscals 2020 and 2021, are predicted to see a steep recovery due to improved demand for automobiles across segments, according to ratings agency CRISIL. This, along with improved ancillary revenues, which is more profitable than vehicle sales, will support overall operating profitability for automobile dealers, and boost cash accruals.

CRISIL says that over the past 12 months the cost of ownership of passenger vehicles (PVs) and two-wheelers (2Ws) has risen by 8-10 per cent following a 15-17 per cent surge in fuel prices. Other factors include price hikes by original equipment manufacturers (OEMs) to cover Bharat Stage (BS)-VI costs, and costlier raw material. While that affected sales, the nationwide lockdown also slammed the brakes on ancillary revenue.

The Indian automotive components industry stands at Rs 3.2 lakh crore (£31m). It derives 60 per cent of its revenue from automobile original equipment manufacturers (OEMs), with the balance split equally between replacement demand and exports. “The ongoing rebound in economic activity will drive a strong recovery for OEMs next fiscal. Improving fleet utilisation and better availability of finance will also improve demand for commercial vehicles, while demand for personal vehicles (passenger cars and two-wheelers) will be driven by improving urban consumer sentiment, resilient rural incomes, modest vehicle price increases and attractive financing options,” said Hetal Gandhi, director, CRISIL Research.

Recovery in new vehicle sales, and ancillary revenues (through service, spare parts and insurance at 10-12 per cent of revenue and 25 per cent of operating profit) would also help restore operating profitability to pre-pandemic levels of 3-4 per cent for automobile dealers. “We are seeing a turnaround. PV and 2W dealers are expected to see revenue growth of 20-22 per cent and 15-17 per cent, respectively, in fiscal 2022. Healthy rural demand and increasing preference for personal mobility will drive growth for PVs and 2Ws. Revenue growth for commercial vehicle (CV) dealers is expected at 35-40 per cent in fiscal 2022, supported by improving economic activity, increase in budget allocation for infrastructure and low base effect,” explained Gautam Shahi, director, CRISIL Ratings.

With improving operating performance, credit ratio or the ratio of the number of rating upgrades to downgrades, is anticipated to improve next fiscal. This is after two years of weak operating performance which impacted the credit metrics of CRISIL Ratings’ rated automobile dealers. This was evident in credit ratio declining to 0.3 time for the sector for April 2020-January 2021, the lowest in the past five fiscals. Increased support from OEMs and moratorium availed by automotive dealers helped manage liquidity pressures.

Automotive dealers should benefit from continued OEM support and strong demand recovery after the lockdown. Sustenance of recovery in demand across segments, normal monsoon and inventory level at dealers’ end will remain monitorables.

The automotive components sector will see revenue rebound 21-23 per cent next fiscal as domestic and export demand revives after two straight contractions. Higher margins will lift operating profits, too. That, along with prudent capital spending and working capital management, will lead to an improvement in the credit profiles of automotive component makers next fiscal, an analysis of 230 of them rated by CRISIL, which account for 40 per cent of sector revenue.

“Better operating performance, controlled capital spend – given that sufficient capacity is available – and prudent working capital management will support recovery in credit profiles of automotive-component suppliers next fiscal. Gearing of the sample set is expected to be comfortable at 0.7-0.8 time as on March 31, 2021, and improve further next fiscal. The interest cover ratio, too, is expected to recover to 4 times from 3 times,” explained Rajeswari Karthigeyan, associate director, CRISIL Ratings. Hopefully, sustained improvement in consumer spending on automobile will happen.

CRISIL has projected a positive outlook for the auto industry. Along with that, the recently released draft of the vehicle scrappage policy is expected to boost the industry. Nitin Gadkari, Union Minister for Road Transport and Highways, has announced that the incentivised policy will facilitate the industry’s growth. The turnover of the automobile industry is estimated to scale from Rs 4.5 lakh crore to Rs 10 lakh crore, besides generating 35,000 jobs. Commercial vehicles that are over 15 years old and passenger vehicles that are over 20 years, will be scrapped if they don’t pass fitness and emission tests.

Government-appointed automated vehicle fitness centres will be established in the country, through a private-public partnership between private firms and state governments. These registered vehicle scrapping facilities (RVSF) will determine a scrap value for the old vehicle. This would be around 4-6 per cent of the showroom price of a new vehicle. A road tax rebate of up to 25 per cent for personal vehicles and up to 15 per cent for commercial vehicles will be offered. The scrapping certificate also allows the waiving of the registration fee upon purchasing a new vehicle. This will raise the demand for new vehicles and lower the carbon impact on the environment.

The scrapped parts of the automobile like steel and aluminium can be reused to manufacture auto parts. On the one hand, it can give rise to a formalised recycling infrastructure. On the other, if there is a possibility of reusing many recycled parts for vehicle production or its spare parts, then the overall cost of vehicle production is likely to be lowered in the long run. This will be a step towards being eco-friendly.

The fitness testing of heavy commercial vehicles will commence in April 2023 and other categories will follow suit in June 2024.

It’s only befitting to ease out old vehicles that enhance the noise-air pollution. The atmosphere will be green and clean and reduce India’s dependence on importing crude oil. The newly announced vehicle scrappage policy is in line with India’s pledge made in the 2015 Paris Climate Agreement. The target is to achieve lower carbon emission and reduce greenhouse emissions by 33-35 per cent by 2030.