Auto dealers may default on loans due to unsold stock
- An expected 25% dip in car sales may dent passenger vehicle dealers’ ability to repay debt
- As sales crash, dealers face an uphill task of repaying banks once loan moratorium ends
Several passenger vehicle dealers are staring at an uncertain future as high levels of unsold inventory of Bharat Stage-VI emission norm compliant vehicles are leading to increase in interest cost, which many of them may not able to repay to banks.
Automobile dealers got a breather from the banks because of the moratorium of six months on loan repayments granted by the Reserve Bank of India. Some of the car makers helped with the inventory cost on the unsold BS-VI stocks but for a limited period.
However, as sales of passenger vehicles are likely to decrease by more than 25% this financial year because of the slowdown in the domestic automobile industry, heightened by the coronavirus outbreak, dealers will likely need to hold on to the inventory for more than twice the expected period.
This will significantly increase the capital requirements of the dealers.
Dealers depend on banks and non-banking financial institutions (NBFCs) for short-term capital requirements, which include buying vehicles from manufacturers, and will struggle to meet repayment commitments.
A Maruti Suzuki India Ltd dealer in Tamil Nadu, who took loans from banks while purchasing stock before the lockdown, is now stuck with inventory of more than 45 days.
However, with automobile sales crashing, dealers will face an uphill task of repaying their loansto the banks once the moratorium gets lifted.
This, according to industry experts, might prompt a slew of dealerships to close down.
Dealers expected stocks to be cleared by the end of March, when sales typically zoom before the end of the financial year. With covid-19 spreading in major cities, auto sales crashed during the month as customers stopped venturing into dealerships.
Sales plunged more than 70% with the lockdown still in place in urban areas, according to a Hyundai dealer in Telangana.
However, the cost of real estate and other fixed cost still have to be borne by the dealers, said the dealer.
“In such a scenario if we continue to carry the stock, the interest cost keeps rising and some may not be able to repay the banks. Most dealerships don’t have cash reserves like big businesses,” said the dealer mentioned above, on condition of anonymity.
Dealers of some of the smaller automobile manufacturers are also beset by the same problem in which the stock they hold at present is much higher than monthly sales.
“Dealers who are renting or paying for physical infrastructure in high cost real estate markets will continue to have a tough time going ahead if demand doesn’t improve,” said Vinay Raghunath, leader, automotive practice, EY India.
“Some dealers may have no choice but to exit the business. We could see some consolidation as well across the dealership network. In addition, many OEMs across segments still have sizeable inventory levels at dealerships and if sales don’t pick up then that can become a further burden on dealers,” he added.
According to ratings agency Crisil, sales of passenger vehicles can decline in the range of 24% to 26% in this financial year as affordability of customers has fallen drastically because of the economic slowdown.
“Sales in the first six months of this year will be down by more than 50% and that means the number of days required to liquidate the stocks will double. How will we pay the interest cost on the inventory and other loans in such a scenario as the fixed cost will be there?” asked a dealer principal of a leading automaker in Haryana, requesting not to be identified.
Some dealers with strong balance sheets are, however, of the opinion that the situation may not be dire for everyone given the partial help from the companies. If sales pick up in the coming months, the situation will start improving, they said.
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First Published:29 May 2020, 12:50 AM IST
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