FADA has indicated unsold BS4 inventory worth Rs 7,000 crore lying with the dealerships. Supreme Court has allowed 10% of BS IV inventory stock to be liquidated within 10 days from lifting of lockdown restrictions. The court also allowed for permission to register already sold BS4 vehicle (which are not yet registered) post relaxation in lockdown situation.
01 Apr 2020 | 10055 Views | By Shahkar Abidi
Ratings agency ICRA claims that with the Supreme Court verdict regarding BS VI deadline extension not going their way, automobile dealers in India are now likely to return few of unsold BS IV inventory to vehicle manufacturers (depending on OEM policies). Further, they may also register these vehicles in the ...
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Ratings agency ICRA claims that with the Supreme Court verdict regarding BS VI deadline extension not going their way, automobile dealers in India are now likely to return few of unsold BS IV inventory to vehicle manufacturers (depending on OEM policies). Further, they may also register these vehicles in the name of associates which will then be sold off later as used or second-hand vehicles.
According to the report, the dealership industry has working capital- intensive operations, and a large amount of debt is primarily towards inventory funding. Consequently, interest cost is another big cost overhead for the industry. While inventory levels have drastically reduced from highs of about two months during March 2019 to below three weeks in March 2020, few dealers still have sizeable BS IV inventory which will not be completely liquidated after the lockdown. FADA has indicated unsold BS IV inventory worth Rs 7,000 crore lying with the dealerships.
The Supreme Court has allowed 10 percent of BS IV inventory stock to be liquidated within 10 days after the lifting of lockdown restrictions. The court also allowed for permission to register already sold BS IV vehicles (which are not yet registered) after relaxation of the lockdown.
“But it is unlikely to provide any meaningful respite to automobile dealerships given that retail demand is likely to be muted for the next few months,” the report says.
Meanwhile, ICRA’s channel check suggests that liquidity position of dealerships will continue to remain stretched for most players, with limited buffer available in their working capital lines. Amongst various segments, two-wheeler (2W) dealerships will be the worst impacted due to sizable BS IV inventory holdings as compared to the passenger vehicle (PV) or commercial-vehicle (CV) segments. Due to deep discounts offered and negative operating leverage, profitability of automobile dealerships is expected to be at a five-year low in FY2020 and may worsen significantly in FY2021.
Covid-19 will further dent the industry’s credit profile, which was already grappling with a demand slowdown since the last 4- 6 quarters.
Automotive retail demand has come under pressure over the last several quarters due to the confluence of multiple factors like liquidity crunch and tighter financing environment, weak rural income and overall slowdown in economic activity which negatively impacts consumer sentiments. Moreover, vehicle prices and cost of ownership have also increased due to regulatory changes (safety, emissions, insurance) and fuel prices. Real income growth has been modest over the past few months, which directly impacts large discretionary purchases like cars and real estate amongst others. OEMs as well as their dealers have provided hefty discounts to clear up dealership inventory to ease their liquidity pressure; however, overall retail demand remains muted.
“In the automotive value chain, automotive automobile dealerships are amongst the worst impacted segment during the current downturn. Historically, automobile dealerships are vulnerable to slow down shocks owing to thin profitability and leveraged capital structure,” the ICRA report adds.
Automobile dealerships have high fixed costs in the form of showroom rentals and employee overheads, and the recent lockdown will significantly dent profitability of automotive dealerships. As a result of high interest burden (towards inventory funding) and negative operating leverage, the industry will report net losses in the next two quarters. The moratorium on debt repayment announced by the Reserve Bank of India may provide a short-term breather for the industry though.