According to the rating agency Crisil, car dealers in the country could bring their income and profitability back to pre-Covid levels in the next financial year.
With sales growing 20-22 percent and operating margin improving by 50-100 basis points (basis points) for the next fiscal year, auto dealerships’ total sales and operating income will be rolled back to pre-Covid based study of 191 according to the outcome of a study of 191 Crisil Ratings.
Revenue, which was significantly impacted in fiscal years 2020 and 2021, will recover strongly in all segments due to the improved demand for automobiles. This, along with improved ancillary income that is more profitable than vehicle sales, will support the car dealers’ overall operational profitability and increase provisions for cash.
“We see a trend reversal. For PV and 2W dealers, sales growth of 20 to 22 percent and 15 to 17 percent, respectively, is expected in the 2022 financial year. Healthy rural demand and an increasing preference for personal mobility will drive the growth of PV and 2W. Revenue growth for commercial vehicle (CV) dealerships is projected to be 35 to 40 percent in FY 2022, aided by an improvement in economic activity, an increase in the infrastructure allocation and a low base effect, said Gautam Shahi, director, Crisil Ratings.
Over the past 12 months, the cost of running passenger cars (PVs) and two-wheelers (2W) has increased after fuel prices have increased by 15 to 17 percent and price increases by original equipment manufacturers (OEMs) by 8 to 10 percent) to cover BS-VI costs and to increase raw material prices. While this affected sales, the statewide lockdown also slowed perks.
The recovery in new car sales and ancillary revenues (through service, parts and insurance at 10 to 12 percent of sales and about 25 percent of operating profit) would also help bring operating profitability back to pre-pandemic levels of 3 to 4 percent for car dealers.
Credit ratio
With the improvement in operational performance, it is expected that the credit ratio (ratio of the number of rating upgrades to downgrades) will improve in the next financial year. This is after two years of poor operating performance affecting car dealers. The increased support from OEMs and the moratorium on the car dealerships helped to cope with the liquidity pressures.
“Inventories are expected to stabilize to 3-4 weeks after nearly 1.5 months earlier this year to ease balance sheet pressures and stabilize the credit profile,” said Sushant Sarode, associate director, Crisil Ratings.
