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Archives

Dealership sector facing one of the worst impacts

29/11/2019 | Author: Autoguide | 0 Comments Back To Home   < Previous News   |   Next news >

Says ICRA

ICRA Ratings has given a ‘Negative’ outlook to the domestic auto dealership sector given expected decline in credit profile of industry participants amid slowing sales and high working capital debt. 
 
The on-going downturn in the automotive industry has severely impacted the profitability of automobile dealerships which is expected to be at a five-year low, it said.
 
As the sector endures one of the worst impacts in the current fiscal, the credit profile of industry participants has weakened, as reflected in some player in its rated portfolio being downgraded or their outlook revised to negative. 
 
An ICRA release said, over last several quarters, automotive retail demand has come under severe pressure due to confluence of multiple factors like liquidity crunch and tighter financing environment, weak rural income and overall slowdown in economic activity. Further, prices and cost of ownership has also increased in recent period due to regulatory changes (safety, emission, insurance) and fuel prices – all of these combined has negatively impact consumer sentiments.  
 
Mr Ashish Modani, Vice-President, ICRA said, “Real income growth has been modest in recent period which directly impacts large discretionary purchases like car, real-estate amongst others. Moreover, demand from the cab aggregator segment has almost dried up due to incentive rationalisation by cab aggregators, which earlier accounted for 8-10 pc of sales. OEMs as well as their dealers are providing hefty discounts to clear up dealership inventory to ease their liquidity pressure; however, overall retail demand remains tepid.” 
 
Owing to deep discount and negative operating leverage, he said profitability of automobile dealerships is expected to at a five-year low in the current fiscal. “Muted industry scenario has stressed credit profile of dealers, especially those of new entrants and has forced some dealerships to shut down as well. Also, while on one hand, OEMs have benefitted from dealership expansion; sales per dealership have not witnessed commensurate increase over last few years”, he added.
 
Historically, automobile dealerships have been vulnerable to slowdown shocks owing to thin profitability and leveraged capital structure. Moreover, inventory push by OEMs in expectation of festive season volume pick-up in 2018 further compounded woes of dealerships during Q4FY2019, though it has been partially addressed in current fiscal following production cut and inventory rationalization measures taken by OEMs. 
 
The NBFC crisis due to liquidity crunch too has adversely impacted availability of channel financing over the last one year due to systemic risk aversion. The availability of finance with dealerships continues to remain a major concern, which has impacted their inventory holding capacity, also reflected in weak wholesale dispatches by OEMs. 
 
Coming to the demand scenario, ICRA said, while retail demand has weakened due to weak consumer sentiments, wholesale dispatches has trailed retail volume since start of current fiscal, as OEMs focused on rationalising dealership inventories. Hence, in the near term, the working capital requirement of dealerships should reduce due to lower inventory holdings. Nevertheless, due to negative operating leverage, profitability and credit profile will remain under pressure over next 3-4 quarters, it added.  
 

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