Revenues of domestic auto dealership industry to expand by 11-13% in FY24: ICRA

Improving consumer sentiments and an ease of supply-side constraints amongst other factors are expected to favourably support the sales growth in the consumer segment.

Autocar Pro News Desk By Autocar Pro News Desk calendar 18 May 2023 Views icon1958 Views Share - Share to Facebook Share to Twitter Share to LinkedIn Share to Whatsapp

Following an estimated expansion of 27–30% in FY23, ICRA projects the revenues of the domestic automobile dealership industry to grow by 11–13% in FY24, aided by 6-9% volume growth and an increase in vehicle prices. 

Factors like improving consumer sentiments, as seen through a continued preference for personal mobility and rising disposable income, easing supply-side constraints, better features in the new product models, a change in the product mix with an increasing skew towards high-priced vehicles, etc., are expected to favourably support the sales growth in the consumer segment. 

In the commercial segment, improving economic activities, rising spending in infrastructure and mining activities, and a stable financing environment will support growth. Potential headwinds could arise from adverse monsoons or the occurrence of the El Nino and its impact on rural demand, supply-related issues, general inflation, and further hardening in financing rates, the rating agency added.

Segment-wise, demand for commercial vehicles (CV) is expected to be supported by replacement demand, a pick-up in mining, infrastructure construction activities, and overall healthy fleet utilization levels. In the passenger vehicle (PV) segment, underlying demand trends remain stable, although supply-chain related factors, an increase in the cost of ownership, and monsoon performance are key monitorables. In the PV segment, demand remains buoyant in segments like special-utility vehicles and luxury cars. In the two-wheeler (2W) segment, headwinds like elevated ownership costs, inflation, and high financing costs remain a challenge, although demand is expected to recover gradually.

Nithya Debbadi, Assistant Vice President and Sector Head – Corporate Ratings, ICRA says: “Margins in the automobile dealership industry are thin, inherent to the distribution nature of the business. While operating margins in FY21 and FY22 were favourably supported by strong pent-up demand and relatively lower discounts amidst supply-related challenges, the operating and net margins in FY23 are expected to have compressed by 30–50 basis points.

Factors like reduced waiting periods, an increase in operating costs amidst general inflation and competition, a rise in interest costs due to an increase in interest rates, and a rise in working capital loans amidst elevated inventory levels are expected to weigh on the margins in FY24. Nevertheless, the industry’s operating margins are expected to be better than the pre-Covid levels.” 

ICRA continued that in the last two years, inventory levels for automobile dealers have declined, given the impact of semiconductor chip shortage issues, especially in the PV segment. However, with semiconductor availability improving gradually, inventory levels increased over the past two quarters. ICRA expects inventory holding levels to increase as compared to the last two years, and normalize gradually to 40–45 days, going forward. Better margins, lower debt (due to low inventory), and a quicker working capital cycle have all contributed to the industry players' improved cash flows and credit metrics over the past two years. The industry debt metrics (interest coverage and total debt/OPBITDA) are expected to remain superior to pre-Covid levels despite some moderation in the near term. 


Tags: ICRA
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