‘Weak vehicle sales may take toll on dealers in FY21’

MUMBAI: 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 201920, 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 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.