Auto dealers in troubled waters may sink to further depths of despair

The present state of the automotive industry has particularly hit dealers with no glimmer of hope in sight. With demand trickling back at best, the credit metrics of dealers is likely to be dented further in the times to come.

According to a recent report prepared by ratings agency Crisil, wafer thin operating profitability is being hampered by two years of double-digit decline in sales volume and a 50 to 100 basis points (bps) moderation. With a fall of 25% in vehicle sales predicted for this fiscal - coming on the back of an 18% decline in 2020, mobility and discretionary spending are taking a whacking.

Crisil notes that dealers stand on a weak footing to deal with demand contraction because of lower sales volume per dealer 'given the aggressive dealership expansions adopted by original equipment manufacturers (OEMs) over the last six fiscals. What this basically means is that even if OEM sales volumes turn green, average sales volume per dealer is expected to continue taking a hit.

Especially vulnerable may be those dealers who do not own showrooms directly or may not have a high mix of more profitable ancillary services. "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 1.1 to 1.2 times this fiscal from 1.5 times in fiscal 2020 and 2 times in fiscal 2019," says Sushant Sarode, Associate Director at Crisil.

Many automakers are going the extra mile to support respective dealer networks but the extent and sustainability of such measures remains to be seen..