Credit profiles are seen as stable despite inventory overhang and modest growth in realisations
INDIA: The domestic passenger vehicle (PV) dealership industry will see revenue growth increase by ~100 basis points (bps) on-year, supported by a modest revival in sales volume even as realisations remain rangebound. While a tad better than last fiscal, growth has eased from the strong post-COVID-19 rebound seen up to fiscal 2024 as volume growth normalised.
The improvement in volume will benefit dealers in two ways. First, ancillary income will rise while promotions and discounts will reduce, lifting operating profitability to 3.2-3.4% after it fell 30-35 bps last fiscal. Second, elevated inventory levels from the last fiscal will moderate. That, and no major capex expected for showroom expansion, will reduce debt levels.
Consequently, the credit profiles of dealers will remain stable after moderating last fiscal from the healthy levels seen after the pandemic. A Crisil Ratings analysis of ~110 PV dealers, indicates as much.
Volume growth is pegged at 4-6% (chart 1 in annexure) this fiscal, with realisations expected to rise 3-4% backed by price increases by original equipment manufacturers (OEMs) and continuing tilt towards sports utility vehicles (SUVs). Consequently, dealers are expected to see high single-digit revenue growth with both the urban segment (constituting two-thirds of the annual demand) and the rural segment growing in tandem.
Says Himank Sharma, Director, Crisil Ratings, “Increasing urban disposable incomes backed by revision in tax slabs, interest rate cuts and a benign inflation, and sustained popularity of SUVs, will fuel urban demand for PVs. In the rural segment, sales of small cars could see an uptick on expectations of a normal monsoon and improved farm incomes amid higher minimum support prices. Consequently, we see the industry growing at 7-9% this fiscal.”
Higher volumes will also lift ancillary revenues from sales of motor insurance and accessories. Also, services and spares revenues will benefit from the high PV sales seen from fiscals 2022 to 2024. All these are relatively higher-margin segments and will cumulatively contribute 11-13% of total revenues, compared with ~10% or lower during the past few fiscals.
With improved revenue visibility and a push towards high-margin businesses, discounts and promotions will be limited to the non-peak seasons instead of year-round seen last fiscal. This reduction in sales promotion costs should provide a 15-20 bps uptick to operating profit margins to 3.2-3.4% this fiscal.
Dealers saw their inventory rise to 50-55 days last fiscal from the normal 30-35 days as retail sales slowed and OEMs sent stock aggressively to push sales numbers. This fiscal, while improved demand will result in inventory correction by 5- 10 days, it will remain higher than the average levels seen prior to fiscal 2024.
Says Ankita Gupta, Associate Director, Crisil Ratings, “With moderate reduction in inventory on-year and limited capital expenditure for new showrooms, debt levels for dealers are likely to decline marginally this fiscal over last. Gearing should improve to 1.0-1.1 times by March 2026 from the peak of 1.2 times seen as of March 2025. Interest coverage is expected to improve to 3.0-3.2 times from 2.9 times last fiscal. Consequently, credit profiles will be stable over the medium term.”
In the road ahead, recovery in retail sales volume, extent of further inventory push by OEMs and improvement in both urban and rural demand will bear watching.