The domestic auto industry is facing numerous challenges due to the economic slowdown and lockdowns. Although sequential recovery is evident across all sub-segments, it remains to be seen how the demand momentum picks up in the festive season. The industry fortunes are linked to the GDP growth and the overall consumer sentiments, which are currently at historic lows, have resulted in purchase deferrals. So far, demand recovery has been supported by a buoyant rural demand, shift in the preference for mobility of personnel and inventory re-stockings at dealers. ICRA’s channel check suggests that retail as well as wholesale financing too is under pressure and delinquencies are on the rise in select segments, though the real trend is masked due to the moratorium opted for by the customers. Given the bleak demand, OEMs too are curtailing capex spends. However, tractors, entry-level motorcycles and cars and smaller LCVs are likely to do well as farm sentiments are expected to remain healthy.
The pandemic has impacted revenues of domestic retail industry severely in Q1 FY2021 and ICRA has a ‘Negative’ credit outlook on the value and lifestyle fashion retailers and a ‘Stable’ credit outlook on the food & grocery retailers. The former is expected to witness revenue decline of 35-42% in FY2021, with a decline in operating profit margin by 300-500 bps. Meaningful ramp up in sales is expected only from Q3 FY2021 backed by festive season buying. Most fashion retailers invoked the force majeure clause in the lockdown period to save on rental costs and are taking other measures (like rental negotiations, rationalisation of spends, deferment of capex) to conserve cash. Online retailing has picked up significantly in pandemic times. F&G retailers on the other hand, are expected to witness revenue growth of 3-7% in FY2021. Share of non-food categories in overall revenue mix is, however, expected to remain lower on YoY basis and constrained by the slowdown in discretionary spends.
The pace of improvement in the collection efficiencies of lenders somewhat moderated post the jump witnessed in June’20. ICRA expects the collections to see a spike in September 2020 because of the typically better collections towards quarter-ends and as the moratorium window closed. Further, inspite of the restructuring window, ICRA expects the Gross NPAs could increase to 4.5-6.3% by March 2021 from about 3.3% in March 2020 for non-Banks and 10.4% to 10.8% from 8.6% as of March 2020 for banks. Entities which are able to better navigate these tough times, would be able to differentiate themselves from peers.
The pan-India electricity demand has gradually recovered and stood at 98% of the pre-Covid levels in Aug’20, backed by the recovery in rural areas, even as recovery in industrial activity was low. However, there is no change in the rating agency’s outlook for about a 5-6% decline in the all-India electricity demand in FY21 over FY20. Further, the decline in demand and collection is estimated to increase the revenue gap for discoms at all India level by ~Rs. 420-450 billion in FY21. In view of this, the GoI has announced a liquidity support scheme of Rs. 900 billion for the state power discoms. For ICRA’s sample set of power generating companies, accounting for ~65% of pending payments from discoms as of Mar’20, the recovery of overdue payments will lower the interest costs by ~9-10% p.a., subject to certain assumptions. More importantly, efforts are required to address the structural issues confronting the distribution segment for a sustainable improvement in discom finances
The Covid-19-induced disruptions continue to adversely impact the financial performance of India Inc. ICRA has taken a large number of negative rating actions since the onset of the COVID-induced disruption and the lockdown, affecting around 16% of its rated portfolio. The instances and the intensity of negative rating actions could have been higher but for the relief availed by the borrowers from lenders in the form of payment moratorium, as permitted by the Reserve Bank of India (RBI). Around 27% of ICRA-rated entities availed a moratorium in payments from lenders, more so in sectors like, real estate, textiles, hospitality, engineering and auto ancillaries. Going ahead, the terms and conditions of the revised loan terms under the resolution plan framework specified by the RBI vide its August 6, 2020 circular would be an important determinant of the credit profiles of entities.
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