Second wave of the Covid-19 pandemic throws auto SMEs out of gear | Business Standard News

Clipped from: https://www.business-standard.com/article/sme/second-wave-of-the-covid-19-pandemic-throws-auto-smes-out-of-gear-121070601510_1.html

Hope rests on exports and festive season accelerating recovery

Maharashtra accounts for close to 20 per cent of India’s total vehicle production, and Chakan is a main hub of it with Mahindra & Mahindra, Bajaj Auto, Mercedes-Benz and Volkswagen, among others, having plants here

The automobile hub of Chakan in Pune district is dotted with advertisements offering industrial sheds on rent. But with manufacturing activity in the area having slowed down, there are few takers for them. Salary delays and job losses are common, too, as small and medium enterprises (SMEs) struggle to cope with the impact of the second wave of Covid-19.

“The pandemic has been like a flood. Those who are weak and inefficient have been swept away, while the strong have survived,” says Lalit Kumar Pahwa, managing director of Pahwa Metaltech.

An auto industry veteran, Pahwa started his venture in Chakan in 2014. His company makes non-sparking hand tools that are used in oil and gas, and paint factories. His company had been on a high growth trajectory, but was laid low due to the two waves of the pandemic.

“During the recent April-June quarter, we saw a 30-40 per cent sequential impact on our business. Increase in commodity prices has also impacted our margins,” he says. But he expects to do better in the second quarter as orders start flowing in again. And though the going was tough, Pahwa says his company secured an emergency line of credit from banks and did not cut salaries or lay off staff.

Others haven’t been this fortunate. As the second Covid-19 wave raged through the country and state after state announced various levels of restrictions, Chakan suffered.

Maharashtra accounts for close to 20 per cent of India’s total vehicle production, and Chakan is a main hub of it with Mahindra & Mahindra, Bajaj Auto, Mercedes-Benz and Volkswagen, among others, having plants here. The SME units in the area are also key suppliers to auto manufacturers outside the state.

Original equipment manufacturers (OEMs) scaled down their production owing to Covid safety and commercial reasons. Auto dealers, too, downed shutters to comply with various state regulations, thus crimping demand. With OEMs cutting down production, manufacturing activity in the auto SMEs dropped to 30-40 per cent in May. For some it has now increased to 70 per cent of the February-March 2021 level.

Migrant workers, who had returned to these factories after the first wave ebbed, left Pune again for their hometowns in the northern and eastern parts of the country. Contract and casual labourers faced the axe as the auto sector SMEs were left with little or no work.

chart

The situation is similar in the adjoining industrial area of Pimpri-Chin­chwad, which is home to nearly 11,000 micro, small and medium enterprises (MSMEs). Around half of them are connected with the automobile sector and 35 per cent cater to engineering works.

“Our operations are at 40 per cent since April. January and February were comfortable. The slide started in March and continues,” says Shrinivas Rathi, partner of Platemasters, which supplies components to auto and construction equipment companies.

Rathi’s company procured raw materials in February and March anticipating 100 per cent production, but is now saddled with excess inventory since manufacturing activity slowed down from April. “We make a profit only if our machines work round the clock. Right now everyone is in a bad shape,” he says.

“While the Maharashtra government allowed industries to operate during this year’s lockdown, sourcing raw materials was difficult as many traders were shut,” says Sandeep Belsare, president of Pimpri-Chinchwad Small Scale Industries Association. “The diversion of oxygen from industrial use to hospitals posed another challenge for small manufacturers. While the Reserve Bank of India announced a framework to help MSMEs in May, a majority of them have been unable to get the benefit,” he claims. Belsare estimates that nearly 10 per cent of the 11,000 MSMEs in Pimpri-Chinchwad region have shut down in the last 12 months as business became unviable.

chart

Industries are now urging the state government to prepare itself better against a possible third wave and provide relief to struggling units. “We have been seeking relief in property taxes and power tariffs,” says Dileep Batwal, secretary, Federation of Chakan Industries.

P Anbalagan, CEO of Maha­rash­tra Industrial Development Cor­poration, says, “We took measures to ensure that industry supply chains are not disrupted during the pandemic and this will help in recovery.” The production levels in auto SMEs in Chakan and Pimpri Chinchwad were 73 per cent in June, he adds.

An analyst explains that SMEs that have a diversified order book and which do not depend on a single product have done better than others.

Increase in steel prices and stretched payment timelines have, meanwhile, added to concerns. The tier I suppliers have had the least impact, while tier II and III suppliers have been badly hit as the ancillary industry depends on high volumes for a break-even. Units providing tool-room jobs had to shut down with no work for the first half of last year, and the situation may repeat this year as well, the analyst says.

Rating agency ICRA estimates that auto components suppliers will witness a 70 per cent sequential decline in operating profit due to lower revenue in Q1 FY22. However, adequate liquidity across most auto component suppliers will help them to tide over Covid 2.0 lockdown restrictions, and exports will provide the much-needed support, ICRA said in its June 22 report.

The staggered easing of restrictions across the country is also helping demand recovery. Wholesale dispatches saw multifold growth in June, albeit on a low base. The momentum is expected to continue. “The festive season will start with Ganesh Chaturthi in September and this will be a major factor for increase in sales,” says Shivaji Akhade, managing director of Autoline Industries, an auto component manufacturer in Pune.

Hope floats.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s