Even though the wholesale automotive dispatches are seeing a glimmer of recovery, retail demand continues to remain weak, indicating wholesale dispatches are resulting in inventory build-up at dealerships. This is as per the latest ICRA report. The survey also highlights that industry participants are not expecting any significant recovery in retail demand in the upcoming festive season.
According to ICRA’s findings, nearly 53 percent 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 percent believe that wholesale funding (inventory funding) from banks/NBFCs has tightened whereas 58 percent of the participants have witnessed an increase in the turnaround time for retail funding. Moreover, 26 percent felt that the rejection rate had increased for retail financing, which is a concern area. Further, almost 63 percent 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.
Offering an insight on the situation Ashish Modani, VP and Co-Head, ICRA says, “We surveyed 19 dealerships, across the PV, two-wheeler 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.”
Auto 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 percent 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.
ICRA 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.
“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,” Modani added.
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