Auto dealers to see slower revenue growth, drop in profit margins in FY25: CRISIL

CRISIL forecasts that inventory levels will decrease slightly in the second half of the fiscal year as sales pick up during the festive season, driven by additional discounts and offers. (Representative Image)

Auto dealers will likely see a slowdown in revenue growth at 7-9 percent this fiscal after a strong 14 percent rise in the previous year, a CRISIL Ratings report has said. It has attributed the drop to reduced sales volume growth and limited price hikes by original equipment manufacturers (OEMs).

Operating margin, too, is expected to decline to around 3 percent, down from the three-year average of 3.5 percent. Weaker sales have led to greater discounts and offers from OEMs and dealers, negatively impacting operating profitability, the report said.

“Moderation in sales volume growth to 6-7 percent this fiscal (8 percent last fiscal) will be led by the PV (passenger vehicle) and CV (commercial vehicle) segments, while 2Ws (two-wheelers) ride well,” Mohit Makhija, Senior Director, CRISIL Ratings Ltd, said.

PV volume may grow slower at 3-5 percent on a high base of past three years. CV sales are expected to be flattish, on an increased base created by the volume growth momentum of the past 2-3 fiscals, amid healthy demand from the infrastructure sector, he said.

On the other hand, 2Ws may provide some respite growing by 8-10 percent on a low base backed by recovery in the rural and semi-urban markets following a likely normal monsoon this season, he said.

CRISIL’s analysis, covering approximately 110 auto dealers across the passenger vehicle, two-wheeler and commercial vehicle segments, said lower profitability and rising inventory would lead to increased working capital debt. Consequently, interest costs are anticipated to rise, putting pressure on credit metrics.

“Given the rising inventory and the marginal reduction in operating margin led by discounts, credit metrics of dealers are expected to moderate this fiscal. Their interest coverage ratio is expected to moderate to 2.7-2.8 times, compared with 3.0-3.1 times over the past two fiscals, while TOL/TNW is seen at 1.9-2.0 times this fiscal, similar to the past two fiscals,” Snehil Shukla, Associate Director, CRISIL Ratings Ltd, said.

Inventory levels will decrease slightly in the second half of the fiscal year as sales pick up during the festival season, driven by additional discounts and offers, it said. However, inventory levels are expected to remain above normal by the end of the year.

The working capital cycle for two-wheeler and commercial vehicle dealers is projected to stay stable.

CRISIL expects price increases to remain modest at 1-2 percent this fiscal, compared to 4-5 percent last year, as dealers continue offering significant discounts to manage inventory. However, rising demand for premium vehicles in the PV and 2W segments — particularly utility vehicles and premium motorcycles and scooters — will help boost blended realizations, partially supporting revenue growth for auto dealers.

The agency also noted that continued support from OEMs should help ease some of the financial and operational pressures on auto dealers in the medium term.