As of today, India is relatively less impacted by COVID than other nations. Because of the very bold and unprecedented move of a complete lockdown for about 40 days, India has managed to restrict the number of positive cases to 17,000.
Considering that India is a country with a population of over 1 billion persons living in challenging on-ground conditions, it is a phenomenal effort of proactive and timely response from the government as well as restraint observed by citizens.
With the start of 2020, we were hoping for some strengthening of the Indian economy and the automotive industry; however, the initial disruption of the supply chain, the transition to BS-VI and the complete lockdown across the country have further weakened the demand for engine-driven equipment, most of which are categorized as discretionary spending.
However, we believe COVID-19 will change the way we commute, bringing back a focus on personal mobility from a shared and localization focus. Also, the evolving business models including working from home and virtual meetings might result in people driving fewer kilometers in their vehicles on an average thus reducing their spending.
PSR Analysis:
Passenger Cars and SUVs: The degree of impact of the coronavirus from the supply side will be low to medium, owing to greater localization of the market leader OEMs–Maruti and Hyundai. This will enable the OEMs to resume and ramp-up production.
However, the segment will have a considerable adverse impact from the demand side throughout 2020 due to the weak customer sentiments, job insecurities and limited focus on discretionary spending, coupled with 10-15% of price increases owing to the transition to BSIV. We anticipate the segment will bounce back in 2021 onwards driven by entry-level vehicles.
Commercial Vehicles: The slowdown which began in Q4 2018, has been worsened by the COVID-19 situation, delaying its recovery until at least the end of Q3 2020.
Despite some stimulus and relaxation of debt repayment schedules from government, we anticipate a wave of bankruptcy by component suppliers. In Q1 2020, we witnessed a leading truck OEM facing substantial delay in component procurements due to the financial health of its suppliers.
Irrespective of the type of COVID-19 lockdown scenario that exists, we believe it will be at least three of four years before the industry sees volumes matching those of 2017.
Construction Equipment: About 30-40% of vehicle components for CE are imported from China, Japan, Korea and some parts of Europe.
However, the government accounts for almost 70% of demand for CE and most of these are project driven. Any delay in revival of projects due to lockdown may result in contractors invoking the force majeure clause which means cost over runs for government.
Hence, although we may see a temporary slowdown, we believe this segment will be least impacted and revival of infrastructure projects will be priority to bail out the slowing economy.
Agriculture: While the government has exempted the agri-machinery and spares from lockdown, sales of tractors remains locked out as they do not fall within the essential category. Currently the COVID-19 footprint hasn’t impacted rural India and if that should happen, the labor shortages are likely to prompt farmers to opt for mechanization.
Also, most of the tractor sales take place in second half of the year and are more dependent on monsoons and the harvest season. As such, we believe tractors would suffer a limited impact in 2020. Also, since agriculture is exempted from the lockdown coupled with a good harvest season; the demand for two-wheelers in rural segment may not take any major hit.
Motorcycles/Scooters/Mopeds: Driven by social distancing in the short term and most affordable commutes, motorcycles or scooters could become the preferred mode of transportation for many daily commuters who would avoid public or mass transportations in urban areas. However, considering the job uncertainty, the demand for used vehicles may see a spurt compared to new vehicles as it would reduce the pressure on their wallets. PSR
Ritvik Kulkarni is Research Analyst – India.
