Partial relaxation by SC does not offer any meaningful respite for auto dealers: ICRA
2020-04-01    [Source:ETAuto]
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    New Delhi: Credit rating agency ICRA Ratings on Tuesday said the recent Supreme Court verdict to allow 10 percent of BS-IV inventory stock to be liquidated within 10 days from lifting of lockdown restrictions (called to contain the spread of coronavirus) is unlikely to provide any meaningful respite to the automobile dealerships given retail demand is likely to be muted for the next few months.

    The Indian automobile industry will upgrade to new BS-VI regulations from April 1 from the existing BS-IV emission norms. However, the apex court has allowed permission to register already sold BS-IV vehicle (which are not yet registered) post relaxation in lockdown situation.

    "Either dealerships will return few of unsold BS-IV inventory to OEMs (depends on OEMs policies) or they will register these vehicles in the name of associates and will be subsequently sold as used/second-hand vehicles," ICRA said.
    Partial relaxation by SC does not offer any meaningful respite for auto dealers: ICRA
    "Our channel check suggests that liquidity position of dealerships continue to remain stretched for most players, with limited buffer available in their working capital lines," it added.

    Amongst various segments, ICRA underscored, two-wheeler dealerships will be worst impacted due to sizable BS-IV inventory holdings as compared to passenger vehicle (PV) or commercial-vehicle (CV) segment.

    According to the Federation of Automobile Dealers' Association, unsold BS-IV inventory worth Rs 7,000 crore is lying with the dealerships.
    Partial relaxation by SC does not offer any meaningful respite for auto dealers: ICRA
    "Owing to deep discount offered and negative operating leverage, profitability of automobile dealerships is expected to be at a five-year low in FY2020 and may worsen significantly in FY2021," ICRA added.
 
    Given retail demand is unlikely to witness any meaningful recovery over the next two quarters, ICRA believes that credit profile of automotive dealerships remains very vulnerable in the interim with possible closure or defaults imminent by few leveraged dealerships.

    For the findings, ICRA analysed 58 automotive dealerships and revealed connection between market share trend of OEMs and their dealerships credit profile. "It has been observed that dealerships across segments (2W, PV or CV) have witnessed stress on their capital structure owing to higher inventory level and low demand," ICRA noted.

    Partial relaxation by SC does not offer any meaningful respite for auto dealers: ICRA
    However, amongst various automotive segments, dealerships of larger PV OEMs like Maruti Suzuki Limited and Hyundai have generally demonstrated stable credit profile as compared to their M&HCV or construction equipment (MCE) counterparts which has been reeling under sharp slowdown in domestic market, agency highlighted.

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