Rising inventory levels, along with moderating profitability to temper credit metrics
Revenue growth of auto dealers will slow to 7-9% this fiscal after a healthy ~14% last fiscal due to moderation in sales volume1 growth and modest price hikes by original equipment manufacturers (OEMs).
Lower sales volume growth has led to higher discounts and offers by OEMs and dealers over the past few months. While a large part of the impact is borne by the OEMs, this will pull down operating profitability2 of auto dealers to ~3%, a tad lower than the average of ~3.5% seen in the past three years.
Lower profitability and increase in inventory will keep working capital debt elevated for dealers this fiscal as well, leading to a crank-up in interest cost and moderating credit metrics.
A CRISIL Ratings analysis of ~110 auto dealers, spanning passenger vehicles (PVs), two-wheelers (2Ws) and commercial vehicles (CVs), indicates as much.
Says Mohit Makhija, Senior Director, CRISIL Ratings Ltd, "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 (see table in annexure). PV volume may grow slower at 3-5% on a high base of past three years3. 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 monsoon4 this season."
Inventory of PV dealers5 is said to have risen above normative levels6 to reach 50-55 days at the end of last fiscal. With sales volume growing at a slower pace (~4%) in the first four months of this fiscal, dealer inventory is estimated to have risen by another 15 days. We expect inventory to ease a bit in the second half as sales picks up in the festive season amid higher discounts and offers, yet it will end higher than normative levels this fiscal, too. The working capital cycle for 2W and CV dealers is foreseen steady.
Price increases will likely be muted at 1-2% this fiscal, compared with 4-5% last fiscal as dealers offer generous discounts to prevent further pile-up in inventory. But increasing demand for premium vehicles7 in the PV and 2W segments, especially fast-growing utility vehicles and premium motorcycles and scooters, will improve the blended realisations, thereby partly supporting overall revenue growth of auto dealers.
Says Snehil Shukla, Associate Director, CRISIL Ratings Ltd, "Given the rising inventory and the marginal reduction in operating margin led by discounts, credit metrics8 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 (see chart in annexure)." |
