Financiers say car inventory at 45-50 days, in an orange zone

Improved semiconductor supplies and weak demand in the non-SUV segment are pushing vehicle inventory to a near alarming level of 45-50 days, say leading financiers HDFC Bank, Mahindra Finance, and Yes Bank in the country.

A slowing GDP growth, high interest rates, and rising vehicle prices have meant that the most affordable end of the market - i.e. the sub Rs 10 lakh has been under prolonged stress, leading to the rise in inventory, even as the demand for higher priced SUVs continues to sustain.

Financers who disburse about US$ 10 billion of finances in a month have raised an orange flag - with the stock reaching beyond comfort levels. About 60% of these disbursals are into inventory funding.

Speaking at the Second Edition of the Federation of Automotive Dealers Associations’ Finance and Insurance Summit in Mumbai this month, Vikas Pandey, Senior Executive VP at the largest private bank HDFC Bank said, from a financier point of view, inventories are moving up and thresholds are crossing to orange zone at the moment.

“We start talking to dealers very actively and understanding how they need to manage. Terming the red zone as anything that crosses 45-50 days, he says that a continuous 3-way dialogue has to happen between the OEM, financier, and dealer, adding that currently, we are managing well,” he said.

However, he 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 the 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 demand. One is that the entry-level prices 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," 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, as 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.

The last couple of quarters - the pressure has been rising 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 a 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 the financier’s responsibility also to rein in on extending loans for stock beyond 45 days - to ensure that their loans don’t default.

When queried as to what the right level of inventory is, Pandey describes the situation as a tightrope walk, saying that 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, this 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 of 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 2% to put on the table, then for him 60 days – 65 days inventory is fine.

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, says some dealers. Just before Covid in FY19, there was a massive push on the inventory - which had severely impacted the profitability of over 90% 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 the dealer’s woes.

Sharvik Shah, Chairperson of FADA Rajasthan says 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, 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% of vehicles supplied to us are the most sought-after models and the balance you push the inventory to make up for monthly numbers. I still have a long order book to deliver, yet I don’t get enough of SUVs, but the other models," added a South India-based dealer principal requesting anonymity.

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 7-8 lakh inventory - we believe that only 60% of them are real buyers, who have done multiple bookings at various brands," added the North India dealer who attended the Banking and Finance summit.

 (With inputs from Manobhava Baruah).