Sales plunge to dent auto dealers' credit metrics this fiscal

IANS File Photo

IANS File Photo

NEW DELHI, JULY 8 (IANS): Two consecutive years of double-digit decline in sales volume and a 50-100 basis points (bps) moderation in already thin operating profitability are expected to materially dent the credit metrics of automotive dealers this fiscal, a study of 2051 CRISIL-rated dealers indicates.


After declining 18 per cent in fiscal 2020, vehicle sales volume is expected to fall another 25 per cent this fiscal because of the Covid-19 pandemic and weak business environment that's curtailing mobility and discretionary spending.


Moreover, the ability of automotive dealers to withstand such demand contraction has reduced because of lower sales volume per dealer, given the aggressive dealership expansions adopted by original equipment manufacturers (OEMs) over the past six fiscals. For instance, while OEM sales volume was 17 per cent higher last fiscal compared with fiscal 2015, average sales volume per dealership was 30 per cent lower.


"In fiscal 2021, a sharp decline in vehicle sales volume and ancillary income (through service, spare parts and insurance, amounting to 10-12 per cent of revenue) will lead to a 50-100 bps moderation in operating profitability because of suboptimal coverage of fixed costs. This drop is substantial, considering the thin operating margin of 3-4 per cent of dealers and 50 bps moderation already seen last fiscal. Dealers with own showrooms and those with higher mix of the more profitable ancillary services will be better placed to withstand the shock though," said Gautam Shahi, Director, CRISIL Ratings.


Among business segments, commercial vehicle (CV) dealers, are expected to be the most impacted due to the sharpest drop expected in sale volumes and lower profitability of 2-3 per cent, compared with passenger vehicle (PV) and two-wheeler (2W) dealers.


Tepid sales, carry-over stocks of BS IV vehicles, and squeeze in profitability will lead to net losses in the first half of the fiscal, increasing their reliance on working capital lines, and impacting liquidity position for most dealers, the rating agency said in its report.


The moratorium offered by the Reserve Bank of India and support from OEMs in the form of early payment of incentives or part interest cost funding are expected to provide some respite on liquidity, but only temporarily.


According to Sushant Sarode, Associate Director, CRISIL Ratings, "With stress rising due to weak vehicle sales, credit metrics of automotive dealers are already deteriorating. With cash accrual expected to halve, credit metrics such as interest coverage ratio will moderate to 1.1-1.2 times this fiscal from 1.5 times in fiscal 2020 and two times in fiscal 2019." Since automotive dealers are a critical link in the overall supply chain, support from OEMs and their financing arms has been forthcoming, and this is critical for them to navigate the current stress. Moreover, increasing preference for personal vehicles to maintain social distancing may gradually revive sales from the second half of this fiscal, and will remain monitorable.