'Sizeable inventories creating panic among dealers and the lockdown is making things worse': Nikunj Sanghi

Veteran dealer says some OEMs, particularly two-wheeler players, started their aggressive BS IV vehicle clearance sales very late leaving their dealers with large inventories of BS IV stock, which have little or no value after April 1.

By Mayank Dhingra

24 Mar 2020

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Nikunj Sanghi: "There are sufficiently large numbers to create panic and the lockdown is only making it worse."

For the Indian automobile industry, which has seen growth evaporating and continuing sales declines even as it heads into the BS VI regime, now barely 8 days away, the ongoing coronavirus outbreak could be a backbreaker for some OEMs.

In the first 11 months of FY2020, total vehicle sales are down 15.85% to 204,98,128 units and all segments are in the red. While OEMs are dealing with the crushing reality in their own way, a fair number of automobile dealer, across the country, who are left with sizeable stock of unsold BS IV vehicles, which cannot be sold after April 1, could be in big trouble financially. From the looks of it, two-wheeler dealers are the ones to be impacted the most.

Without disclosing any concrete numbers of piled-up vehicle inventory, as they are not tabulated in one single database when with dealers, Nikunj Sanghi, Managing Director, JS 4Wheel Motors, told Autocar Professional today, "There are sufficiently large numbers to create panic and the lockdown is only making it worse."

According to the veteran dealer of two-wheelers, four-wheelers and commercial vehicles, "There are two distress points. One being the unsold inventory and the other which is sold, but unregistered yet."

"If you take the average 15-day inventory of Hero MotoCorp, Honda Motorcycle & Scooter India and 4-5 other principal manufacturers, you'll end up reaching upwards of 700,000 units in two-wheelers but any figure will be a guesstimate and there's no way to substantiate that," explains Sanghi.

It is estimated that 15-day inventory levels of BS IV stock of 5-6 leading two-wheeler OEMs would be upwards of 700,000 units at present. The losses that dealers face from such a situation would run into hundreds of crores of rupees.

Two-wheelers, not surprisingly, form the most voluminous segment in vehicle sales in India and an average dealer in a town has a sales target of around 500 units every month. It is to be noted that automobile dealers work on a cash-credit limit with banks, with about 30 percent of their own margins invested to acquire the inventory from OEMs. "So, even if the vehicle stock remains unsold, dealers still have to pay back the dues or they default," says Sanghi. "Bank borrowing is a relationship of trust and faith," he adds.

To make the government aware of the stressed levels of business, the business community and traders have submitted a memorandum to the special economic response task force, christened 'Covid-19 Task Force', instituted by the Prime Minister and to be chaired by Finance Minister Nirmala Sitharaman. They are seeking a relaxation of repayment terms by 90-180 days. Dealer body FADA is hopeful that an announcement would be made very soon to prevent NPAs from dealers.

In his interview with Autocar Professional earlier this month, Sanghi had cautioned of a likely bloodbath in the two-wheeler segment after March 10. "While dealers of most manufacturers are confident of clearing the (BS IV) stocks by March 10, two-wheelers are still reeling under tremendous pain," Sanghi had said. His words seems prophetic now.

A catastrophe in the making
Now, with a substantial part of the country currently under government-mandated lockdown, which could only grow to more regions, the only hope left for dealers/OEMs left saddled with unsold BS IV stocks is an extension from the Supreme Court on the March 31 deadline.

The apex dealer body FADA has filed a plea with the Supreme Court to extend the deadline. While its last hearing was deferred, FADA is hopeful of a possible hearing on March 27.

"If relief doesn't come, it will be a catastrophe," remarks Sanghi.

Such a scenario will wreck havoc for dealers, a significant number of whom might need to shut shop because of the overlooking losses "as their inventory value plummets to less than 10 percent, which is the scrap value in most cases," explains Sanghi. Other than FADA, Hero MotoCorp and Honda Motorcycle and Scooter India (HMSI) have also appealed to the apex court in India at the OEM level.

"So, there are a lot of hopes from March 27," points out Sanghi. While the Supreme Court has also shifted its proceedings online and advocates are attending virtual courts, if at all the hearing gets turned down, "then we expect some response from the OEMs," says Sanghi.

"OEMs' resources are far greater than that of dealers. Dealerships will perish if help doesn't come," he adds.

While the current situation has impacted everybody, the stress on Maruti Suzuki India dealers would be minimal right now considering they started selling BS VI-compliant vehicles way in advance in 2019 itself. Similar is the case with new players such as Kia Motors India, which started off sales with a BS VI-only line-up.

Situation grim, lockdown or otherwise
Sanghi points out that the real-world, on-ground situation had started worsening even before the government of India took its first nationwide lockdown step on March 22. ""The customer walk-ins had dramatically reduced by then, with people fearing the spread of the disease," said Sanghi.

Moreover, the veteran dealer says vehicle manufacturers announced their aggressive BS IV clearance schemes too late. "Most consumer schemes started coming in only after March 15, when they should have been announced at least 10 days in advance," he points out.

While the only precedent available for such a scenario is the BS III to BS IV transition, which allowed dealers merely five days to liquidate the older inventory, the scenario is completely different as there's a clear restriction on registration of BS IV vehicles as of April 1, 2020.

As a result, while there's no defined process of an OEM buying back a vehicle invoiced to a dealer, there won't be any other option if the Supreme Court doesn't extend the deadline.

"Even knocking off the vehicle price substantially by the OEM won't be an option if the vehicle cannot be registered," says Sanghi.

FY2021 a washout
With most dealers having to cope up with the difficult situation with limited resources and managing fixed costs even through times of little or no business, the Coronavirus aftermath will have a detrimental effect on their profits and sustainability. "The lockdown is obviously not perpetual or infinite but once things resume, it will almost be like rebuilding the economy," remarks Sanghi.

"While some footfalls will happen for critical purchases, it will take a lot of time for the sentiment to improve. The next fiscal year is a washout already," concludes Sanghi on a grim note.

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