India’s automobile industry is headed for another year of double-digit sales decline this fiscal, given the extended lockdown to contain the Covid-19 pandemic. Overall sales volume would plunge to multi-year lows, with sales of passenger vehicles¹ (PVs) and commercial vehicles (CVs) reaching fiscal 2010 levels.

What started as a supply-side pain has quickly engulfed the demand side, too, with job-loss and pay-cut fears dampening consumer sentiment.

Says Hetal Gandhi, Director, Crisil Research, “Automobile sales are running out of steam as urban income sentiment wilts under the pandemic. We assessed ~26,000 companies that have a total employee cost of Rs 7 lakh crore. It indicates that over 60% of this cost resides in companies that are expected to see a sharp reduction in revenue growth, and where employees are a meaningful cost head. This is expected to lead to higher risk of job losses or pay cuts.”

Given this, PVs, a big-ticket item with a replacement share of 60-70%, are expected to see purchasing decisions postponed. That’s also because the segment has a high finance penetration of 78-80% and given the income uncertainty, fewer consumers would be willing to take a loan.

At the other end, CV sales have been languishing under the impact of new axle-load norms, and are unlikely to show much recovery till freight demand remains low.

However, tractors and two-wheelers are likely to see relatively faster recovery in the second half of this fiscal. Both the segments benefit from a bumper rabi production and the forecast of a normal monsoon, which augur well for rural incomes.

Within two-wheelers, which have a lower replacement share of ~50% and lower finance penetration of 35-40%, motorcycles are expected to fare better, riding on rural demand.

As for tractors, sentiment is only moderately negative as agricultural activity is exempt from the lockdown and as the prospects for crop season are better.

All this bodes ill for capacity utilisation in the sector.

Says Pushan Sharma, Associate Director, Crisil Research, “A sharp contraction in sales would lead to a decline in average utilisation at the industry level from ~58% to below ~50% this fiscal. In the PV segment, utilization would roll down from 58% to 44%, in two-wheelers from 65% to 50%, in tractors from 59% to 51%, and in CVs from 51% to 39%.”

A recovery in demand is expected only from the festival season in the third quarter of this fiscal – and largely for two-wheelers and tractors, which have a higher rural share.

Indeed, PVs and CVs, which have a higher share of replacement demand, are expected to recover only in the fourth quarter.

For the fiscal as a whole, sales of PVs are expected to decline 24-26%, compared with a 21-23% contraction for two-wheelers. CV sales are expected to decline 26-28%. However, for reasons detailed earlier, tractor sales are likely to fall only ~7-9%.

¹ Passenger vehicles comprise both cars and utility vehicles