Automobile dealers to clock their fastest revenue growth in three fiscals: Report

Automobile dealers are set to clock their fastest revenue growth in three fiscals with sales accelerating 20-25 per cent year-on-year on the back of 12-14 per cent 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 per cent, 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 per cent of total income in the current fiscal from 8-9 per cent last fiscal will help stabilise operating margin at 3-5 per cent as compared to 4 per cent 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 recovery in retail demand and easing of semi-conductor 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.

"With strong recovery in sales, the operating profitability of PV and CV dealers will climb back to pre-pandemic levels of 4-5 per cent, while the margins of two-wheeler dealers will rise gradually to 3-4 per cent this fiscal (against 4 per cent pre-pandemic)," said Gautam Shahi, Director at Crisil Ratings. PV dealers will see strong volume growth of 17-19 per cent in the current fiscal in line with improved OEM (Original Equipment Manufacturers) growth outlook, and increasing average realisation per vehicle due to higher proportion of higher priced utility vehicle sales, leading to overall revenue growth of 24-26 per cent, as per Crisil forecast.

For CV dealers, volume growth has been pegged at 20-22 per cent, on the back of revival in economic activity, higher replacement demand, and the government's infrastructure push. It also said that the price hikes of 4-5 per cent, following higher input costs, will push overall revenue growth in the CV segment to 25-27 per cent.

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 per cent leading to a modest revenue growth of 15-18 per cent 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 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.