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Automobile dealers are expected to register strong revenue growth this fiscal with sales growing 20%-25% year-on-year driven by 12%-14% volume growth, according to CRISIL rating agency.
The strong sales numbers will be driven by easing supply-side constraints, shift in product mix towards higher priced vehicles, increasing preference for personal mobility, higher economic activity and 5-7% increase in prices, according to the rating agency.
According to the report, higher vehicle sales and larger contribution of the more-profitable ancillary revenue at 10%-12% of total income in the current fiscal compared with 8%-9% last fiscal will stabilise operating margin at 3%-5%. Consequently, it will lead to healthier credit risk profiles, the report added.
Demand Recovery
Retail auto registration continued to recover in the current fiscal after it recovered partially in FY22 and declined in FY21. In the first five months of FY23, the recovery was aided by retail demand and easing of semi-conductor shortages.
However, revenue recovery will not be uniform across segments, CRISL Ratings report said. The passenger vehicle (PV) category will continue to witness strong recovery, while commercial vehicle (CV) and two-wheeler (2W) dealers will grow on a lower base due to subdued sales in the past two-three financial year.
Volume Growth
Passenger vehicle dealers will see strong volume growth of 17-19% in the current fiscal on improved OEM growth outlook and increasing average realisation per vehicle. The report said higher proportion of higher priced utility vehicle sales will lead to overall revenue growth of 24-26%.
Meanwhile, commercial vehicle dealers are expected to witness volume growth at 20-22% in FY23, on the back of revival in economic activity, higher replacement demand, and the government’s infrastructure push. The rating agency said that price rise of 4-5% due to higher input costs, will push overall revenue growth in the CV segment to 25-27%.
On the two-wheeler sales front, reopening of educational institutes and offices have supported two-wheeler sales growth this fiscal. But, slower recovery in rural demand, rising prices and competition from electric two-wheelers will continue to put pressure on volume growth at 9-11%, leading to a modest revenue growth of 15-18% on a low base in the last fiscal.
Financial Outlook
CRISIL Ratings said that the interest coverage ratio is likely to increase to 3.0-3.5 times in this fiscal from 2.6 times in fiscal 2022, while debt-to-equity ratio is expected to improve to 1.0-1.1 times by end of March 2023, from 1.3 times previous fiscal.
“Better revenue and profitability growth should increase cash accrual of auto dealers in fiscal 2023,” said Sushant Sarode, Associate Director, CRISIL Ratings. Sarode added that likely reduction in inventory following higher demand will help auto dealers to reduce their working capital costs. “Higher cash flows, lower inventory cost and strengthening balance sheets will improve debt metrics of auto dealers this fiscal,” noted Sarode.
The rating agency said credit ratio, which improved to 5.25 in fiscal 2022 after falling to 0.44 in fiscal 2021, indicated a strong recovery and , is expected to remain healthy. Meanwhile, the rating agency cautioned that volume, monsoon trend and inventory of dealers remain key monitorables.