Weak vehicle sales may take toll on automotive dealers in FY21: Crisil

Two consecutive years of double-digit decline in sales volume and a 50-100 basis points moderation in already thin operating profitability are expected to materially dent the credit metrics of automotive dealers this fiscal, ratings agency Crisil said on Wednesday.

Vehicles sales, which dropped 18 per cent in 2019-20, are likely to shrink by around a quarter this fiscal owning to COVID-19 pandemic coupled with weak business environment amid restricted mobility and curtailed discretionary spending, it said in a report based on the analysis of 2,051-Crisil-rated dealers.

Also, the ability of automotive dealers to withstand such demand contraction has reduced because of lower sales volume per dealer, given the aggressive dealership expansions adopted by the Original Equipment Manufacturers (OEMs) over the past six fiscals, it added.

“In fiscal 2021, a sharp decline in vehicle sales volume and ancillary income will lead to a 50-100 basis points moderation in operating profitability because of sub-optimal coverage of fixed costs. This drop is substantial, considering the thin operating margin of 3-4 per cent of dealers and around 50 basis points moderation already seen last fiscal," said Gautam Shahi, Director, Crisil Ratings.

According to Shahi, dealers with own showrooms and those with higher mix of the more profitable ancillary services will be better placed to withstand the shock.

The ancillary revenue, comprising spare parts and insurance, amounts to 10-12 per cent of the total revenue, as per Crisil Ratings.

The rating agency said commercial vehicle (CV) dealers are expected to be the most impacted due to the sharpest drop expected in sale volumes and lower profitability of 2-3 per cent, compared with passenger vehicle (PV) and two-wheeler (2W) dealers.

Tepid sales, carry-over stocks of BS-IV vehicles (mainly 2Ws and PVs), and squeeze in profitability will lead to net losses in the first half of the fiscal, increasing their reliance on working capital lines, and impacting liquidity position for most dealers, it said.

“With stress rising due to weak vehicle sales, credit metrics of automotive dealers are already deteriorating. With cash accrual expected to halve, credit metrics such as interest coverage ratio will moderate to around 1.1-1.2 times this fiscal from 1.5 times in fiscal 2020 and around 2 times in fiscal 2019," said Sushant Sarode, Associate Director, Crisil Ratings.

The moratorium offered by RBI and support from OEMs in the form of early payment of incentives or part-interest cost funding are expected to provide some respite on liquidity, but only temporarily, Crisil said, adding since automotive dealers are a critical link in the overall supply chain, support from OEMs and their financing arms has been forthcoming, and this is critical for them to navigate the current stress.

Moreover, increasing preference for personal vehicles to maintain social distancing may gradually revive sales from the second half of this fiscal, and will remain a monitorable factor, it said.