Lockdown deepens woes of automobile dealers: Ind-Ra

The Supreme Court's order on March 27 to allow automobile dealers, except in the National Capital Region, to sell 10 per cent of unsold Bharat Stage IV (BS-IV) compliant inventory within 10 days after the nation-wide lockdown ends on April 14, 2020 comes as a little respite to an already struggling automobile dealership, it said.

The ratings agency said some original equipment manufacturers (OEMs) have announced support to auto dealers either by taking the ownership of unsold stock, or by requesting their inventory financing partners for an extension of the moratorium to their dealers due to the lockdown.

OEMs could also compensate their dealers for the unsold stock to a certain extent, which was also seen during the goods and services tax implementation, it said in a statement.

"However, given that the sluggish demand in the industry over the last 12 months, Ind-Ra opines that the current measures might not be adequate to cover the losses of the dealers," it added.

Furthermore, the three-month moratorium on the instalments of all term loans is likely to trouble most dealers, who usually sit on short-term borrowings rather than term loans, as automobile dealers' operations are working capital intensive. However, a large part of the debt is related to inventory funding, which is also likely to reduce due to lower sales, Ind-Ra said.

The agency further said it "expects the COVID-19 spread and the resultant lockdown, crippling most economic and commercial activities, will negatively impact the demand for automobiles".

Even after the lockdown ends on April 14, 2020, consumers would be wary to come out for a discretionary purchase and hence a 10-day timeline might not be sufficient to sell the inventory, it said.

Ind-Ra believes that liquidating the unsold BS-IV stock within 10 days amid a desperately low buyer sentiment due to the COVID-19 pandemic would call for heavy discounts and still might not be adequate to alleviate the demand woes of auto dealers and could impact their profitability.

Furthermore, Ind-Ra said, "if the shutdown remains for a prolonged period, it could lead to weaker consumer sentiments amid lower income across various sections on account of a decreased industrial output, reduced transportation and an overall challenging economic environment. Hence, there is no likelihood that the sale of BS-VI vehicles would pick up any time soon.