Inventory days (unsold stock with the dealer) have risen to two months for cars and three months for bikes, while there is a working capital squeeze due to reluctance from banks to lend, says Ashish Kale, President, Federation of Automobile Dealers Association
Despite the mouth-watering discounts offered to buyers, automobile dealers are struggling to convert inquiries into actual sales over the past five months.
Inventory days (unsold stock with the dealer) have risen to two months for cars and three months for bikes, while there is a working capital squeeze due to reluctance from banks to lend.
Ashish Kale, President, Federation of Automobile Dealers Association, spoke to Moneycontrol's Swaraj Baggonkar highlighting these challenges. Edited excerpts.
A. Ever since the hike in third-party insurance premiums were announced from September onwards, sales have been on a downward trend. We do not subscribe to the fact that there is a drop in fundamental demand. There is a slowdown, but the silver lining is that customer inquiry level has not fallen as much as retail has fallen. What we gather is that demand postponement is happening.
A. The reasons are manifold and one of the primary ones is that there is an overall liquidity crunch. January was an aberration for passenger vehicles, but that was because of pent up demand and new launches. Hike in third-party insurance premiums was the other reason why retail demand was impacted.Q. What is the contribution of new launches to sales?
A. For December and January, almost all manufacturers had a scheme on running models. We have not seen ‘runner’ models (best-sellers) having this kind of schemes earlier. The overall heat is being felt by every original equipment manufacturer (OEM). New models are drawing the crowds and this has arrested the drop a bit, otherwise it would have been much higher.Q. What is the situation on discounts?
A. There is no doubt about high discounts, but despite that we do not see conversions happening. January was the only abnormal month. February also saw huge discount schemes, but we have not seen any conversions. We remain hopeful of a sharp revival in demand ahead of general elections, favourable RBI policy and a bountiful monsoon.Q. The pressure on profitability is higher than ever for dealers. Have you seen instances of dealers shutting down businesses?
A. It has happened, but not at an alarming extent. The first five months of the year like last year were good for business. The slowdown surely adds to the operational cost pressure. Dealers are facing the heat due to high inventory. Consumer sentiment has weakened and does not seem to be reviving anytime soon.Q. What are the challenges with regards to liquidity?
A. We are also customers of the bank just like any retail customer. Only thing is that our borrowing requirements are different. Banks have been cautious about lending to the auto sector for the past 6-8 months. There is pressure on working capital. Higher working capital cost in today’s times definitely pinches the dealer community.Q. Will there be more instances of dealers getting out the business since we will see another trough after implementation of Bharat Stage-VI?A. Our business is very capital intensive. It is not easy to enter our business nor is it easy to exit. I do not see dealers shutting down the business based on 6-12 months of operational loss. Yes, dealer exits have already started and we are seeing a lesser number of entrants trying to enter the business. Overall investment required to enter the business has grown substantially and current returns are not healthy as one would have wanted. For existing dealers to get out of it is difficult after having invested so much.