Auto Industry hit by coronavirus fears, as companies worldwide halt production

The global auto industry is in a recession, while the Indian auto industry has been bombarded with woes of its own. And to make matters worse for everybody, the coronavirus fears have now forced several companies to temporarily halt or drastically curtail production at their plants.

These include the likes of Maruti Suzuki, Mahindra & Mahindra, Honda Cars India, Honda Motorcycle & Scooter India, Fiat Chrysler Automobiles (FCA), Hero MotorCorp, Tata Motors and Toyota Kirloskar in India, besides several companies like Porsche, Lamborghini, Skoda, Aston Martin, Bentley, Volvo Cars, Yamaha,  among others globally.

The Indian auto industry is already reeling under a huge set of woes that include sliding sales, transition related problems from BS IV to BS VI, a muddled auto policy that wants to promoted electric vehicles at the cost of growth of IC engine vehicles, etc. The OEM plant shut downs including partial shutdowns are going to adversely impact the several ancillary companies supplying components to these OEMs. In short, it’s going to be mayhem in the Indian auto industry.

According to Dolat Capital Market Private Limited, in its research paper, noted that the automobile industry in India is facing one of the most severe challenges at the moment. On one hand, it is faced with the daunting task of meeting the stringent deadline of transitioning from BS-IV to BS-VI, and on the other hand the spread of the COVID-19 virus is fading the volume outlook.

In fact the Federation of Automobile Dealers Associations (FADA) on behalf of its members recently approached the Supreme Court and has filed an Interlocutory Application along with an Application seeking modification in Writ Petition No. 13029 of 1985 in the matter of M. C. Mehta Vs Union Of India & others, dated October 24, 2018 whereby it has been directed that “…no motor vehicle conforming to emission standard Bharat Stage-IV shall be sold or registered in the entire country with effect from 01.04.2020.”

FADA President Ashish Harsharaj Kale said, “Post our initial application, necessitated due to huge unsold BS-IV inventory and slowing sales, getting rejected by the Hon’ble apex court on 14th February’20, there has been a drastic change in circumstances in conducting business as usual. SARS-CoV-2 a.k.a Coronavirus (Covid-19) which emerged in Wuhan in the Hubei province of China has spread rapidly across the globe and also in India.

Following this in the past week there has been drastic drop in sales and customer walk-ins have reduced to a trickle as caution sets in due to fear of spreading of the Virus. Counter sales has fallen by 60-70% across auto dealerships in these past few days.

The situation has worsened in the past 3-4 days with partial lockdown situation in many towns and cities and few district magistrates have started issuing notices of closure of shops and establishments including auto dealerships to stop the spread of virus.”

Kale went on to say, “Owning to situations which are beyond our control and the Fact that Many of our members may Face dealership closures if leftover with unsold BS-IV stocks, FADA has once again approached the apex body with a request for permission of sale and registration of BS-IV vehicles till 31st May’20 and hopes to get an urgent hearing in the Hon’ble Supreme Court owing to the criticality of the issue and the deadline of 31st March approaching fast.”

Dolat Capital Market said in its report that COVID-19 will have an immediate short-term adverse impact on the automobile industry, due to a decline in incomes and a slowdown in commercial activity.

“Based on our interactions over the past week, we derive the following feedback the virus outbreak and the concomitant advisory by state governments has led to a 50% drop in footfalls in automobile showrooms across the country. This may worsen further as the next couple of weeks as the government encourages ‘voluntary curfew’,” the company noted.

“Meanwhile FADA has filed a petition in the SC where we expect the government to be called upon by the Court to take a stand. We expect that the government will take a pro industry stand and request for an extension of one or two quarters. In case it chooses not to do so, the losses to the distributors /auto players could be material to drive another downgrade of our estimates,” the company noted in its research report.

Dolat Capital Market further noted in its report that the worst impacted MHCV segment continue to remain challenging, due to the slowdown in the economy. Government intervention would be only solace. In addition, the pandemic and the oil crash have increased the risks in the automobile industry, as a weaker global economy can adversely affect exports.

The current demand slump has led to a fall in Natural Rubber prices by 8% MoM to 129/kg, which makes up half of raw material costs, would also aid margin expansion. None of the tyre companies are offering any discounts despite fall in volume. Instead, they're resorting to cut down inventory levels. In H2FY16, sharp decline in crude prices had positively impacted margins in H1FY17. Such sharp fall in Crude prices, below $40/barrel, will lead to margin expansions by 100-150bps, the company research note said.