Crisil Rating expects auto industry revnue to better pre-pandemic levels | The Financial Express

Crisil Rating expects auto industry revenue to better pre-pandemic levels

Analysts at Crisil believe higher vehicle sales and greater contribution of the more-profitable ancillary revenue (service, spare parts and insurance) will help stabilise operating margin.

Crisil Rating expects auto industry revenue to better pre-pandemic levels
Retail auto registrations, which plunged in FY2021 and revived partially in FY2022, continued to recover in the first five months of FY2023. (Photo source: Pixabay)

As the festive season sets in automobile dealers are set to clock their fastest revenue growth in three fiscals with sales accelerating 20-25 percent annualy on the back of 12-14 percent volume growth, as per Crisil Rating.

According to the rating vertical, this growth across the auto space is powered by five primary factors –

  • Increasing preference for personal mobility
  • Higher economic activity
  • Easing supply-side constraints
  • Shift in product mix towards higher priced vehicles
  • Price hikes of 5-7%

Analysts at Crisil believe higher vehicle sales and greater contribution of the more-profitable ancillary revenue (service, spare parts and insurance) to 10-12 percent of total income in FY2023 from 8-9 percent last fiscal will help stabilise operating margin at 3-5 percent (4 percent in FY2022).

Retail auto registrations, which plunged in FY2021 and revived partially in FY2022, continued to recover in the first five months (April-August) of this fiscal with recovery in retail demand and easing of semi-conductor shortages.

Gautam Shahi, Director, Crisil Ratings said, “With strong recovery in sales, the operating profitability of PV and CV dealers will climb back to pre-pandemic levels of 4-5 percent, while the margins of two-wheeler dealers will rise gradually to 3-4 percent this fiscal (against 4 percent pre-pandemic).”

This growth in profitability will be supported by strong volume growth as per Crisil Rating. Theyexpect PV dealers to clock strong 17-19 percent volume growth in line with improved OEM growth outlook and increasing average realisation per vehicle.

For CV dealers, Crisil Rating expects volume growth of 20-22 percent , on the back of revival in economic activity, higher replacement demand and the government’s infrastructure push.

Though reopening of educational institutes and offices have been tailwinds for two-wheeler sales, slower recovery in rural demand, price hikes and competition from electric two-wheelers will continue to rein in volume growth to 9-11 percent.

Sushant Sarode, Associate Director, CRISIL Ratings, “Better revenue and profitability growth should increase cash accrual of auto dealers in FY2023 which, along with expected reduction in inventory following higher demand, will help auto dealers reduce working capital costs. Higher cash flows, lower inventory cost and strengthening balance sheets will improve debt metrics of auto dealers this fiscal.”

However with the RBI hiking rates yet again to tackle inflation and cutting down the growth projection, interest rates and the rural demand might become the key aspects to watch out for going forward.

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