Vehicle sales that already saw a dip of 18 per cent in 2020 is likely to further dip by 25 per cent his fiscal, stated a CRISIL report. This decline is likely to come on the back of the coronavirus pandemic and weak business environment that has seen consumers curtailing discretionary spending. "Two consecutive years of double-digit decline in sales volume and a 50-100 basis points (bps) moderation in already-thin operating profitability are expected to materially dent the credit metrics of automotive dealers this fiscal," it said.
The report stated that the ability of automotive dealers to take on such demand contraction has also reduced given the lower sales volume and the aggressive dealership expansions undertaken by the original equipment manufacturers (OEMs) in the last six fiscals.
Out of the segments, commercial vehicle (CV) dealers are most likely to be impacted and see the sharpest drop in comparison with passenger vehicle (PV) and two-wheeler (2W) dealers. The report said that low sales, carryover stocks of BS-IV vehicles and squeeze in profitability will lead to net losses in the first half of the fiscal. This will increase dependence on working capital lines and impact liquidity position for most dealers.
Gautam Shahi, Director, CRISIL Ratings said, "In fiscal 2021, a sharp decline in vehicle sales volume and ancillary income (through service, spare parts and insurance, amounting to 10-12% of revenue) will lead to a 50-100 bps moderation in operating profitability because of suboptimal coverage of fixed costs. This drop is substantial, considering the thin operating margin of 3-4% of dealers and 50 bps moderation already seen last fiscal. Dealers with own showrooms and those with higher mix of the more profitable ancillary services will be better placed to withstand the shock though."
The CRISIL report also anticipates RBI moratorium to offer some respite on liquidity but says that it would only be temporary. The report states that increasing preference for personal vehicles to maintain social distancing might gradually revive sales in the second half of the fiscal.