Record inventories are expected to lead to an incremental expense of up to Rs 1,000 crore for auto dealers during the festival season this year.
11 Sep 2024 | 1861 Views | By Amit Vijay M
Even as automakers in India are gearing up for a strong festival season, the festive cheer is yet to reach the dealers.
Auto retailers are bracing for a hit of around Rs 900-1000 crore to their combined bottom lines due to rising unsold inventories, going by the numbers shared ...
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Even as automakers in India are gearing up for a strong festival season, the festive cheer is yet to reach the dealers.
Auto retailers are bracing for a hit of around Rs 900-1000 crore to their combined bottom lines due to rising unsold inventories, going by the numbers shared by officials of the Federation of Automobile Dealers Associations at the organisation’s annual convention in Delhi.
Senior officials from the Federation of Automobile Dealers Associations (FADA) pointed out that even the auto manufacturers’ association, SIAM, expects only a 2-3% growth in sales this year. However, they said, the top five automakers are adamant about clocking double-digit growth this year and are aggressively pushing stocks to dealer yards anticipating high festival demand.
This mismatch between OEMs’ ambitions and the ground reality has translated into mounting stocks at dealer yards, they said.
Because of this, FADA officials added, dealer inventory has risen to 75 days of sales from 67 in June. Typically, dealers prefer to keep the stocks in the 40-50 day range during the festival season.
Dealers said that high-demand SUVs such as Mahindra’s XUV700 and Scorpio N, Tata’s Harrier and Safari, Maruti Suzuki's Grand Vitara and even best-selling MPVs such as the Suzuki Ertiga are now readily available at most locations.
However, incoming FADA president, CS Vigneshwar, said he expects the situation to start resolving during the festive season as sales pick up pace.
Crippling Costs
Given that the total retail industry turnover is close to Rs 1,000 crore per day, FADA officials believe that the 75 days of stock implies that more than Rs 75,000 crore of dealer funds are now tied up in the form of inventories.
For auto dealers, the inventory pile up comes with its own costs. Dealerships typically get a margin of around 3.5% of the sale price. However, high working capital costs – in the form of interest – can eat significantly into this margin.
Working capital loans taken by the dealers currently come with an interest cost of 0.9%.
Therefore, to finance an inventory of one month, a dealer would have to set apart around 0.9% of its monthly sales as cost of capital or interest.
However, given that inventories have risen to about 2.3 months, interest costs have also increased to around 2% of the turnover (2.3 multiplied by 0.9%).
Since the monthly industry turnover is at around Rs 30,000 crores, the total monthly outflow of interest to banks from dealers is estimated at close to 600 crores, compared to around Rs 400-420 crore during festival season without excess inventory of around 20-22 days.
Given that the high levels of inventories are likely to persist for five months, the excess cost sustained by dealers over the five month season this year is estimated at Rs 900-1,000 crore (Rs 180-200 crore multiplied by 5).
Mitigation Measures
With OEMS going on the production overdrive despite a slowdown, dealers fear that they will be left with no choice but to offer discounts to liquidate their stocks and free up their working capital. Recently, Tata Motors offered a 2 lakh discount across all its models.
FADA outgoing President Manish Raj Singhania said December 2024 will see an unprecedented discount bonanza.
"This would be the first time the auto retail industry had to deal with such steep discounts since the beginning of the Covid period, when original equipment manufacturers (OEMs) reduced production," he said.
Sachin Mahajan, Chairman of FADA Maharashtra, is confident that corrections will not occur during the festival season, while Nikunj Sanghi, an industry veteran, said corrections are unlikely even after the holiday season.
Sanghi, Singhania, and Mahajan collectively assert that OEMs’ strategy is benefiting banks and finance companies as they walk away with higher interest fees from dealers.
OEM Responses
Auto OEMs have acknowledged the warning signs raised by industry analysts. A senior official from India's leading passenger car manufacturer, Maruti Suzuki, stated at the recent SIAM summit that they are aware of the projected moderate growth of between 2-3 percent, viewing it as a cyclical challenge faced by the industry.
Despite the temporary dip in demand, the company anticipates a resurgence in demand for the small car segment within the next two years, and is proceeding with plans to establish new production facilities at Kharkhoda.
Some of the other OEM officials were less worried, pointing out that despite the inclement monsoon season, the auto retail sector saw a strong year-on-year growth of 14% in July 2024, surpassing two million units. They remain confident of a clear pick up in sales during the festival season, helping bring down inventory to normal levels.
Meanwhile, Maruti Suzuki and other OEMs have claimed to have reduced wholesale deliveries to dealerships. However, Singhania of FADA disputed this. Citing retail figures, he said there was a significant disparity between the actual vehicles sold and the reported wholesale dispatches.