Auto dealers are expected to post their fastest revenue growth in three fiscal years, with sales up 20-25% year-on-year on volume growth of 12-14%, according to a report released Wednesday.
This will be facilitated by a growing preference for personal mobility, higher economic activity, an easing of supply-side constraints, a shift in product mix towards more expensive vehicles, and price increases of 5 to 7 %, Crisil Ratings said in its report.
According to the report, higher vehicle sales and greater contribution from more profitable ancillary revenue to 10-12% of total revenue in the current fiscal year, compared to 8-9% in the prior fiscal year, will help stabilize the operating margin at 3 to 5%. compared to 4% in fiscal 2022.
This could lead to healthier credit risk profiles, a study of 113 car dealerships rated by Crisil Ratings showed.
Ancillary revenues include service, spare parts and insurance revenues.
Retail auto registrations, which plunged in FY21 and partially recovered in FY2022, have continued to recover in the first five months of this fiscal year as demand picks up retail and alleviating semiconductor shortages.
The revenue recovery, however, will not be uniform across all dealership segments, Crisil said.
He noted that while passenger vehicle (PV) dealerships will continue to see a robust recovery, commercial vehicle (CV) and two-wheeler (2W) dealerships will experience weaker growth due to subdued sales in the over the past two or three fiscal years.
“With a strong recovery in sales, PV and CV dealer operating profitability will recover to pre-pandemic levels of 4-5%, while two-wheeler dealer margins will gradually increase to 3-4% over the course of the year. of this financial year (compared to 4% before the pandemic),” said Gautam Shahi, director of Crisil Ratings.
Photovoltaic dealers will see strong volume growth of 17-19% in the current fiscal year, in line with improved growth prospects for OEMs (original equipment manufacturers) and increased average realization per vehicle due to a higher proportion of sales of higher priced commercial vehicles, resulting in an overall increase in revenue growth of 24 to 26 percent, according to Crisil forecasts.
For CV dealerships, volume growth was pegged at 20-22%, thanks to the recovery in economic activity, higher replacement demand and the government’s infrastructure push.
He also said price increases of 4-5%, following rising input costs, will push overall CV segment revenue growth to 25-27%.
Although the reopening of educational institutions and offices has been a tailwind for the growth of two-wheeler sales, this slower fiscal recovery in rural demand, price increases and competition from electric two-wheelers will continue. to limit volume growth to 9-11%, which will result in modest revenue growth of 15-18% on a weak fiscal 2022 base, he said.
“Improved revenue and profitability growth is expected to increase auto dealers‘ cash accumulation in fiscal 2023, which, together with the expected reduction in inventory following higher demand, will help auto dealers reduce their working capital costs.
“Higher cash flow, lower inventory costs and stronger balance sheets will improve auto dealership metrics this fiscal year.” said Sushant Sarode, associate director at Crisil Ratings.