Auto finance: The tug of war
Finding the ideal balance between car stock penetration and inventory levels at dealerships is what is making the finance community wary.
Product planners at automotive OEMs are responsible for models that are to be produced and sold, but many may not know that dealers also have a big advisory role, as they are the ones who are in direct contact with the market and have a greater understanding of what sells and what doesn’t.
In a situation where improved semiconductor supplies and weak demand in the non-SUV segment is pushing vehicle inventory to a near alarming level of 45-50 days, leading financiers like HDFC Bank, Mahindra Finance and Yes Bank in the country are becoming a worried lot.
Adding to their woes is a slowing GDP growth, high interest rates and rising vehicle prices that has meant the most affordable end of the market — i.e. sub Rs 10 lakh has been under prolonged stress, leading to rise in inventory even as the demand for higher priced SUVs continues to sustain.
Financers who disburse about US$ 10 billion worth of loans in a month have raised an orange flag as stocks move beyond the comfort levels. About 60 percent of these disbursals go into inventory funding.
Speaking at the second edition of the Federation of Automotive Dealers Association's Finance and Insurance Summit in Mumbai last month, Vikas Pandey, Senior Executive VP at the largest private bank HDFC Bank said from a financer’s point of view, inventories are moving up and thresholds are reaching the orange zone at the moment.
“We start talking to dealers very actively and understanding how they need to manage and a continuous three-way dialogue has to happen between the OEM, financier and dealers — all saying that currently we are managing well,” he said.
However, Pandey assured that a significant chunk of inventory is being delivered to customers as long as the stock is moving, things should be OK. But he reiterated, "It is up to all the three stakeholders’ — vehicle makers, financers and dealers — to ensure that things keep moving.
Having scaled a new peak in FY23, the high base is catching up and the industry is moving towards a low single digit growth, say sources. While in the months of April and May, the industry registered a double-digit growth, with a strong base of June 2022, it will be hard to sustain the momentum.
Raul Rebello, COO of Mahindra Finance admits that there has been a stretch in inventory periods in some markets including hinterlands. “I think what is getting more stretched now is the entry-level car segment. There you’re definitely seeing a slight weaning off of the demand, as product prices in the entry-level have gone up significantly, so the affordability bit has come in. And you can’t blame the OEMs because they have had to add safety features, so with the price angle coming into play, the affordability has gone out of the window," explained Rebello.
He informed that the lenders have been quite particular, because in the entry segment, where financiers don’t want to play the LTV game, because it immediately shows up.
"Lenders haven’t been as generous in increasing LTV or increasing tenures. So you are going to see a slight bump in the entry level passenger vehicle segment, and we are seeing it over a period of time," Rebello added.
In the last couple of quarters, the pressure has been rising with the ecosystem because of growing inventory. This is after two strong years of growth, wherein dealers barely shelled out any interest cost, with stocks remaining at a very low level.
The rise in inventory happens at a time, when the costs are moving up for the dealers and since majority of the stock piled up is of low moving brands, the dealers have been compelled to shell out discounts to reduce the pressure of rising interest cost for carrying inventory.
Dealers claim that some vehicle makers in tandem with financiers end up extending the book size to three months' stock in the greed for market share. And hence it is financiers responsibility also to rein in on extending loans for stock beyond 45 days — to ensure that their loans dont default. When queried as to what the right level of inventory is, Pandey describes the situation as a tightrope walk and the entire process also has to be relooked.
"OEMs want stock penetration to go up, dealers want inventory levels to go down. Can financiers and dealers together push the boundaries and get more demand up, is probably where we will have to go. We are seeing times where we are getting into that orange zone. Dealers need to understand what the sales trends are, look at the right sales forecasting, and what models are moving and not moving fast," explained Pandey.
Lavesh Sardana, Country Head - Retail Assets and Debt Management, Yes Bank said that from a financial perspective, dealers have to understand that 30 days shave off 75-80 basis points of their margins. In terms of affordability, what one dealer can afford to lose, determines the cycle. If some dealer can have two percent to put on the table, then for him 60 – 65 days inventory
On the specific question of the right inventory level for dealers, Sardana says that the issue was not only the costs but the rise in panic, with the increasing number of days, “So it’s compounding. A high rate of interest cost is also supported by high discount offerings in the market. Thus in this context, he said, "30 days were normal, 45 days were overweight and 60 days were obese in my view."
It is a case of Deja Vu, say some dealers. Just before Covid in FY19, there was a massive push on inventory that had severely impacted the profitability of over 90 percent of the dealer fraternity. Some proactive vehicle makers did move to retail market share as against the wholesale push, however the majority were still banking on dispatches market share, thereby compounding dealers woes.
Sharvik Shah, Chairperson of FADA Rajasthan says that the market should look at retail market shares. “At FADA we believe in talking about retail market shares and till the time the whole industry doesn’t accept that, if this is taken care of then OEMs will not put pressure on dealers to stack up inventories. Yes, working capital is very critical for a dealership to be running properly,” he adds.
While there are warning signals in the market, the industry thankfully continues to have strong demand for new models, especially SUVs. The enquiries and booking levels are still holding up well, says the auto retail fraternity for SUVs, adding that if they get supplies of SUV as against low selling models, they are fine with 45 days stock. "Only 10-20 percent of vehicles supplied to us are the most sought after models and balance you push the inventory to make up for monthly numbers. I still have a long orderbook to deliver, yet I don’t get enough of SUVs, but the other models," added the South India based dealer principal.
As more SUVs are getting delivered, the cancellation rates are also rising, given the fact that the potential buyers had multiple bookings across three to four different brands. Hence, once his or her car is delivered, there are multiple cancellations at various dealers.
"The vehicle makers claim that they are sitting on over seven to eight lakh booking and we believe that only 60 percent of them are real buyers, who have done multiple bookings at various brands," added a North India dealer who attended the Banking and Finance summit.
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