an independent and professional investment Information and Credit Rating Agency
states that automobile dealerships across India continue to face tough times.
As if the demand slowdown due to macroeconomic challenges were not enough, the
Covid-19 related stress has dealt one more severe blow.
per ICRA, automobile dealership is among the worst impacted segments within the
entire automotive value chain. After witnessing a sharp 75%-90% decline during
Q1 FY2021 across the automotive sub-segments, wholesale dispatches are on
recovery trend with certain segments like two-wheelers (2W) and passenger
vehicles (PV) registering Y-o-Y growth in the wholesale volume during Sep-2020.
demand continues to remain weak, indicating wholesale dispatches is resulting
in inventory build-up at dealerships.
Modani, Vice President & Co-Head, ICRA says, “We surveyed 19 dealerships,
across the PV, 2W and the CV segments with presence in the rural, semi-urban
and the metro areas. Overall the response indicates that sentiments remain
cautiously optimistic with most dealerships expecting flattish to moderate
growth trend in the upcoming festive season. Most players (58%) are expecting a
flattish (±5% Y-o-Y) performance during this period and none of the
participants projected over 10% growth during the season. Amongst all
dealerships, the CV dealers continue to witness pressure whereas there is a
certain level of optimism amongst the PV dealers.”
ICRA’s other key findings, nearly 53% participants highlighted that conversion
has improved, as only serious buyers are stepping out during the Covid-19
period. However, financing continues to remain a concern for the industry, as
lenders are becoming increasingly stringent while sanctioning which will be a
drag on the overall volume growth. Almost 74% believe that wholesale funding
(inventory funding) from banks/NBFCs has tightened whereas 58% of the
participants have witnessed an increase in the turnaround time for retail
funding. Moreover, 26% felt that the rejection rate had increased for retail
financing, which is a concern area. Further, almost 63% of the participants
have highlighted that the OEMs have not provided any material financial support
and gross margin has largely remained at a similar level.
dealerships are witnessing increased inventory levels, this trend, is reflected
from much higher wholesale dispatches than retail volume. The survey
highlighted an increase in inventory levels with 47% of the dealerships having
four to seven weeks of inventory level compared to three to four weeks of
normal inventory, indicating inventory stocking ahead of the festive season.
automobile retail demand, the same has come under pressure over the last
several quarters due to the confluence of multiple factors like liquidity
crunch and tighter financing environment, and the overall slowdown in economic
activity, which negatively impacted consumer sentiments. Moreover, vehicle
prices and cost of ownership also increased in the recent period due to
regulatory changes (safety, emission, insurance) and fuel prices. Real income
growth has been modest in the recent period, which directly impacts large
discretionary purchases like car, real-estate amongst others. ICRA’s survey
also highlights that industry participants are not expecting any significant
recovery in retail demand in the upcoming festive season.
mentions that while dealerships have undertaken various cost control measures,
including rationalisation of sales outlets, workforce and other fixed
overheads, the profitability of automobile dealerships is expected to be at a
multi-year low in FY2021, because of a sharp decline in volumes. Inventory
levels have declined from the highs of Q4FY2019, but it seems to be on a rising
trajectory again. Most automobile dealerships have availed of moratoriums on
bank borrowings, and their liquidity position will come under further stress
because of the repayment burden, post moratorium. The credit profile of
automotive dealerships remains vulnerable in the near term with possible
closure/defaults imminent by a few leveraged dealerships.
further adds that, “The overall credit stress is likely to remain high in the
sector - given muted volumes, high fixed overheads, rising inventory levels;
and decline in profitability. A few dealerships may likely also witness
closure. ICRA has a ‘Negative’ credit outlook on the automobile dealership
industry as downgrades exceed upgrades. Further, the liquidity position of most
dealerships was already under severe stress, and losses during Q1 FY2021 have
further compounded their woes. The ratings agency expects liquidity position of
industry participants to remain under pressure over the next two to three
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