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Auto dealers may see pre-Covid levels of revenue, profitability in FY22: Crisil

Our Bureau Chennai | Updated on March 11, 2021

Revenues will see a steep recovery due to improved demand for automobiles across segments   -  The Hindu

Recovery in new vehicle sales, and ancillary revenues will also help restore operating profitability

Automobile dealers in the country may see their revenue and profitability return to pre-Covid levels during next fiscal, says rating agency Crisil.

With 20-22 per cent revenue growth and 50-100 basis points (bps) improvement in operating margin expected for next fiscal, overall revenue and operating profits of automobile dealers are set to scale back to pre-Covid levels, according to outcome of a study of 191 rated by Crisil Ratings.

Revenues, which were significantly impacted in fiscals 2020 and 2021, will see a steep recovery due to improved demand for automobiles across segments. This, along with improved ancillary revenues, which is more profitable than vehicle sales, will support overall operating profitability for automobile dealers, and boost cash accruals.

“We are seeing a turnaround. PV and 2W dealers are expected to see revenue growth of 20-22 per cent and 15-17 per cent, respectively, in fiscal 2022. Healthy rural demand and increasing preference for personal mobility will drive growth for PVs and 2Ws. Revenue growth for commercial vehicle (CV) dealers is expected at 35-40 per cent in fiscal 2022, supported by improving economic activity, increase in budget allocation for infrastructure, and low base effect, said Gautam Shahi, Director, Crisil Ratings.

In the past 12 months, the cost of ownership of passenger vehicles (PVs) and two-wheelers (2Ws) has increased by 8-10 per cent following a 15-17 per centsurge in fuel prices, price hikes by original equipment manufacturers (OEMs) to cover BS-VI costs, and spike in raw material prices. While that affected sales, the nationwide lockdown also slammed the brakes on ancillary revenue.

Recovery in new vehicle sales, and ancillary revenues (through service, spare parts and insurance at 10-12 per cent of revenue and about 25 per cent of operating profit) would also help restore operating profitability to pre-pandemic levels of 3-4 per cent for automobile dealers.

Credit ratio

With improving operating performance, credit ratio (ratio of number of rating upgrades to downgrades) is expected to improve next fiscal. This is after two years of weak operating performance which impacted the automobile dealers. Increased support from OEMs and moratorium availed by automotive dealers helped manage liquidity pressures.

“Inventory levels are expected to stabilise at 3-4 weeks from almost 1.5 months seen earlier this year, obviating balance sheet pressures and stabilising credit profiles,” said Sushant Sarode, Associate Director, Crisil Ratings.

Published on March 11, 2021

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