Second wave of Covid-19 infections could delay auto-recovery

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The second wave of covid-19 and the extended lockdowns in major states of the country has paused auto sector recovery for the short-term. While in the long-term it is expected to recover faster due to timely rains, an increase in exports, and a rise in demand forecast.

Maharashtra, Haryana, Karnataka, Tamil Nadu, and Delhi announced strict lockdown measures in the first week of April, manufacturing, and sales of automobiles have come under pressure since then.

According to Motilal Oswal report, year on year comparison and prediction cant be made due to the lockdown impact of Covid-19 from May’20, but in May’2021, 2Wheeler Wholesale volumes are estimated to decline by 37% Month on month(MoM), Passenger vehicles by 69%, commercial vehicles by 74% and Tractors by 21%.

While Sharekhan analyses that few OEMs have reduced Q1FY2022 guidance by 10%-20%.

What has been the impact of the second wave?

The sudden hike in Covid cases from March-end reaching peak levels in April and May 2021 has affected the world’s fourth-largest auto sector nation badly. Lockdowns have disrupted supply chains in April, while restrictions in South India further disrupted supply situations from mid-May.

Dealerships were also affected with almost zero demand. “Not only have many auto OEMs and auto ancillaries resorted to plant shutdowns as a restrictive measure, but also automotive dealerships across regions have not been operational in light of regional restrictions imposed by various states and local authorities in order to curb the pandemic,” ICRA said.

Many auto companies have either ceased operations or reduced production considerably, including Honda Motor Co., Hero MotoCorp Ltd, and Hyundai Motor Co. Bajaj Auto Ltd, and Tata Motors, which have also maintained limited production. “As deliveries have ceased and sales are forecast to remain below normal for the next two months, some firms have shut down plants as well,’’ explains Sharekhan analyst.

How would be May 2021 figure?

Automobile monthly sales are expected to remain subdued in May 2021 as well, “marred by extension of lockdowns from most states to break the chain of Covid-19 infections, depending upon the severity of the Covid wave in the respective states. We expect OEMs to register 30%-60% lower dispatches compared to average normal monthly sales in May, as far as domestic dispatches are concerned,’’ says Sharekhan report.

Even Motilal Oswal had reported a decline in may sales, saying, “In May’21, most regions were under an ensuing Covid-led lockdown. Inquiries were significantly lower than normal levels, except in Tractors. While a strong order book and ongoing preference for personal mobility would support PVs, strong demand for 2Ws seems unlikely on high inventory in the system and the severe impact of the second Covid wave on rural and semi-urban markets. Wholesales are expected to decline MoM due to the impact of localized lockdowns by states and supply-side issues.”

However, The vaccination drive has improved in May 2021 and states such as Maharashtra, Delhi, and Uttar Pradesh, showing a reduced number of daily confirmed Covid cases. Two-wheeler and commercial vehicle sales might take longer since rural markets have been hit hard.

When is the industry expected to recover?

The fall in covid-19 cases and the vaccination drive will give a start to the sector but it will take time to show the recovery. International demand would be a key player in the recovery of the sector. High existing order books and customer preference for personal mobility are expected to fuel demand for Maruti Suzuki India Ltd, Hyundai Motor Ltd, and Tata Motors Ltd. Two-wheeler and commercial vehicle sales might take longer since rural markets have been impacted more.

However, “the recovery is still unpredictable as the situation is different this time. The fear of the third wave of covid-19, slow vaccination process, and shortage in shortage in manufacturing auto components have kept the sentiments on the lower side,” says Vinkesh Gulati, President of Federation of Automobile Dealers Associations (FADA).

While a Crisil research analysis shows that the automotive components sector will see revenue rebound 21 to 23% next fiscal as domestic and export demand revives after two straight contractions.

OEMs remained optimistic for FY2022 growth, driven by strong underline demand, the timely arrival of the monsoon season, and government initiatives to increase vaccination drive in the country.  As far as demand is concerned, we expect pent-up demand will continue to drive growth for the automobile sector from Q2FY2022, asserts auto analyst in Sharekhan.