Revenue growth for auto dealers is expected to decelerate to 7-9% this fiscal year, down from around 14% last fiscal year. This slowdown is due to lower sales volume growth and modest price hikes by original equipment manufacturers (OEMs). Rising inventory levels and moderating profitability are also contributing factors, which are anticipated to affect credit metrics and elevate working capital debt for auto dealers.
Sales volume growth is projected to moderate to 6-7% this fiscal year, compared to 8% last fiscal year. Passenger vehicles (PVs) and commercial vehicles (CVs) are the primary segments driving this deceleration, while two-wheelers (2Ws) are expected to perform better. Mohit Makhija, Senior Director at CRISIL Ratings Ltd, explains the situation:
“Moderation in sales volume growth to 6-7% this fiscal (8% last fiscal) will be led by the PV and CV segments, while 2Ws ride well. PV volume may grow slower at 3-5% on a high base of past three years. CV sales is seen flattish, again on an increased base created by the volume growth momentum of the past 2-3 fiscals, amid healthy demand from the infrastructure sector. On the other hand, 2Ws may provide some respite growing by 8-10% on a low base backed by recovery in the rural and semi-urban markets following a likely normal monsoon this season.”
High passenger vehicle inventory
The inventory levels for PV dealers have risen above normative levels, reaching 50-55 days at the end of the last fiscal year. With sales volume growing at around 4% in the first four months of this fiscal year, it is estimated that dealer inventory has increased by another 15 days. Although it is expected that inventory levels will ease in the second half of the year due to the festive season and higher discounts, they are still projected to remain higher than normative levels.
Auto sector future forecast
Price increases are likely to be limited to 1-2% this fiscal year, compared to 4-5% in the previous year, as dealers offer more discounts to prevent further inventory build-up. However, the demand for premium vehicles in both the PV and 2W segments, especially fast-growing utility vehicles and premium motorcycles and scooters, is expected to improve blended realisations, partially supporting overall revenue growth.
Despite these factors, the rising inventory and the slight reduction in operating margins due to discounts are anticipated to moderate the credit metrics for auto dealers. Snehil Shukla, Associate Director at CRISIL Ratings Ltd, provides further insights:
“Given the rising inventory and the marginal reduction in operating margin led by discounts, credit metrics of dealers are expected to moderate this fiscal. Their interest coverage ratio is expected to moderate to 2.7-2.8 times, compared with 3.0-3.1 times over the past two fiscals, while TOL/TNW is seen at 1.9-2.0 times this fiscal, similar to the past two fiscals.”
CRISIL Ratings’ analysis of around 110 auto dealers, covering PVs, 2Ws, and CVs, indicates these trends. The data underscores that lower sales volumes have resulted in higher discounts and offers from OEMs and dealers in recent months. While OEMs bear much of this impact, it is predicted to decrease the operating profitability of auto dealers to approximately 3%, slightly lower than the average of 3.5% observed over the past three years.
While the market for 2Ws shows growth potential, the slower pace in PVs and flat CV sales, coupled with high inventory levels and modest price increases, is set to challenge auto dealers. Adjustments in credit metrics and working capital debt are anticipated to mitigate these issues. CRISIL Ratings’ detailed analysis provides a comprehensive understanding of the auto dealers’ market dynamics for this fiscal year.
