Automobile dealers are set to clock their fastest revenue growth in three fiscals with sales accelerating 20-25 percent year-on-year on the back of 12-14 percent volume growth, a report said on Wednesday. This will be aided by increasing preference for personal mobility, higher economic activity, easing supply-side constraints, shift in product mix towards higher priced vehicles, and price hikes of 5-7 percent, Crisil Ratings said in its report.
According to the report, higher vehicle sales and greater contribution of the more-profitable ancillary revenue to 10-12 percent of total income in the current fiscal from 8-9 percent last fiscal will help stabilise operating margin at 3-5 percent as compared to 4 percent in fiscal 2022. This could lead to healthier credit risk profiles, a study of 113 automobile dealers rated by Crisil Ratings showed.
Ancillary revenue includes revenue from service, spare parts, and insurance. Retail auto registrations, which plunged in FY21 and revived partially in fiscal 2022, continued to recover in the first five months of this fiscal with a recovery in retail demand and the easing of semiconductor shortages.
Recovery in revenue, however, will not be uniform across dealership segments, Crisil said. It noted that while passenger vehicle (PV) dealers will continue to witness robust recovery, commercial vehicle (CV) and two-wheeler (2W) dealers will grow on a lower base due to subdued sales over the last two-three fiscals.
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“With a strong recovery in sales, the operating profitability of PV and CV dealers will climb back to pre-pandemic levels of 4-5 percent, while the margins of two-wheeler dealers will rise gradually to 3-4 percent this fiscal (against 4 percent pre-pandemic),” said Gautam Shahi, Director at Crisil Ratings. PV dealers will see strong volume growth of 17-19 percent in the current fiscal in line with improved OEM (Original Equipment Manufacturers) growth outlook, and increasing average realisation per vehicle due to a higher proportion of higher-priced utility vehicle sales, leading to overall revenue growth of 24-26 percent, as per Crisil forecast.
For CV dealers, volume growth has been pegged at 20-22 percent, on the back of a revival in economic activity, higher replacement demand, and the government’s infrastructure push. It also said that the price hikes of 4-5 percent, following higher input costs, will push overall revenue growth in the CV segment to 25-27 percent.
Though reopening of educational institutes and offices have been tailwinds for two-wheeler sales growth this fiscal, slower recovery in rural demand, price hikes, and competition from electric two-wheelers will continue to constrain volume growth to 9-11 percent leading to modest revenue growth of 15-18 percent on a low base of fiscal 2022, it said. “Better revenue and profitability growth should increase cash accrual of auto dealers in fiscal 2023 which, along with an expected reduction in inventory following higher demand, will help auto dealers reduce working capital costs.
“Higher cash flows, lower inventory cost, and strengthening balance sheets will improve debt metrics of auto dealers this fiscal,” said Sushant Sarode, Associate Director at Crisil Ratings.
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